Is the Gold Bubble About to Burst?

Today’s Financial Times contains an article “Gold price falls as Asian durchases dwindle” The article points out that purchases of gold by the two largest sources of demand for gold, India and China, have fallen sharply iin recent months “abruptly halting a consumption boom that started five years ago with the onset of the financial crisis.”

The article notes that gold prices, just over $1600 an ounce yesterday, are now about 17% below their all-time high (in nominal terms) of $1920 an ounce set almost a year ago last September.

With weakening Indian and Chinese demand, and a price stagnating well below the peak reached a year ago, speculative demand for gold may be poised to collapse, triggering a self-reinforcing downward spiral. That’s what happened after gold peaked at about $900 an ounce in the early 1980s, ushering in a long downward slide in which gold lost almost 75% of its peak value. That process was helped by historically high real interest rates, but that doesn’t mean that the current gold bubble couldn’t burst even with historically low real rates.

The article concludes with the assessment of Marcus Grubb, managing director for investment at the London-based Worl Gold Council:

The wild card is what will happen to investment in the second half and that will be driven by QE [quantitative easing, or central banks printing money] in the US, the eurozone and even emerging countries like China

So what we seem to have here is two potentially segmented clusters of markets that are dominated by inconsistent expectations. Bond markets are dominated by expectations of low inflation, while gold markets (commodities, futures, gold mines shares) may be the refuge of believers in imminent (or medium-term) hyperinflation. The confidence of the hyperinflationists seems to be wavering, but apparently they are still nursing hopes that the next round of QE will finally work its magic.

Now my question — and it’s primarily directed to all those believers in the efficient market hypothesis out there — is how does one explain the apparently inconsistent expectations underlying the bond markets and the gold markets. Should there not be a profitable trading strategy out there that would enable one to arbitrage the inconsistent expectations of the gold markets and the bond markets? If not, what does that say about the efficient market hypothesis?