Gold Bubble Alert: Prices Rise as Demand Falls

It's not officially a gold bubble until it pops, but the latest supply and demand figures are sure making the price of the precious metal look frothy.

True, total global supply of gold fell slightly year-over-year, by 4 percent to 1,059 tonnes, at the end of the second quarter, according to a new report from the World Gold Council. And Econ 101 says that when supply declines in face of rising demand, prices go up.

The kicker is that demand for gold fell at a far greater pace than supply.

Total global demand for gold (including jewelry, coins, bars, exchange-traded funds, technology and, yes, dentistry) declined 17 percent year-over-year during the second quarter, according to WGC.

Yet the price of gold rose by more than 25 percent over that span. Indeed, over the last four quarters sequentially, demand for gold, excluding central banks, increased 5 percent, while the price of gold jumped 26 percent.

When supply, demand and price get out of whack, well, something fundamentally wrong is going on.

Just have a look at this chart from WGC. The bars represent quarterly global demand for gold in tonnes over the last three years. The line shows the price of gold in dollars:

With the exception of a slight uptick at the end of last year, demand for gold has been dropping steadily since the middle of 2010. The price, however, has defied the laws of gravity and -- more important -- economics.

It won't be a surprise if fear and the allure of rising prices push gold up to its real all-time high of nearly $2,400 an ounce. After the tech and housing bubbles, it should be even less of a shock if the bottom falls out.

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