Professor Nouriel Roubini, never a fan of gold, gives his reasons why he thinks that gold is in a deflating bubble situation and is set to trend lower – perhaps down to $1,000 by 2015.
LONDON (MINEWEB) – As a Devil’s Advocate writing a contrary opinion to those who are convinced that the gold price will soon resume its upwards trajectory, Economist Nouriel Roubini has few equals. Indeed to the ardent gold believer Roubini may well be considered the Devil himself, rather than just an Advocate for the Satanic master.
In his latest opinion on gold, Roubini pulls few punches, although he does condescend at the end that the gold price will be volatile and could still temporarily move higher in the next few years. But he qualifies this in saying that the overall trend will be lower over time as the global economy mends itself. “The gold rush is over”, he says and predicts gold falling towards $1,000 by 2015. The run up in gold from $800 in early 2009 to over $1900 in 2012 “had all the features of a bubble” he says. “And now, like all asset-price surges that are divorced from the fundamentals of supply and demand, the gold bubble is deflating.”
While any number of the bullish commentators on gold take delight in publishing a number of reasons why gold will move upwards, Roubini does the opposite with his six reasons why gold will continue to fall back.
Reason No. 1: Gold prices tend to spike when there are serious economic, financial, and geopolitical risks in the global economy. But, even though this may be the case in a real and continuing financial meltdown he feels that gold would still be a poor investment with margin calls forcing sales with the result that the gold price can be extremely volatile, up and down, even at the peak of such a crisis.
Reason No. 2: Roubini notes that gold performs best when there is a risk of high inflation, as its popularity as a store of value increases, but points out that despite the huge amount of monetary easing, inflation has remained low, and may actually be falling due to the velocity of money collapsing. Commercial banks are seen as hoarding the liquidity provided by the Central banks, while reduced purchasing power and low wage demands because of high unemployment are keeping inflationary pressures down.
Reason No. 3: The lack of earnings from gold argument – While other forms of investment generate income, gold does not. So Roubini sees gold solely as a play on capital appreciation and that with the global economy, arguably, recovering, other assets are seen as generating higher returns. Indeed, QE-boosted US and global equities have vastly outperformed gold since the sharp rise in gold prices in early 2009.
Reason No. 4: The arguably more positive outlook about the US and the global economy implies that over time the Federal Reserve and other central banks will exit from quantitative easing and zero policy rates, which means that real rates will rise, rather than fall.
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