Six reasons why the gold rush is over - Nouriel Roubini
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.
Posted: Monday , 03 Jun 2013
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 interest policy rates, which means that real rates will rise, rather than fall. With gold performing better in a zero or negative interest rate environment Roubini thus sees its attraction waning as interest rates start to rise.
Reason No. 5: Roubini argues that some of the Central banks of the more indebted nations may be tempted to liquidate part of their gold holdings and thus further depress the gold market. He points specifically to Cyprus where a report that it might sell a small fraction – some €400 million ($520 million) – of its gold reserves may have contributed to triggering a 13% fall in gold prices in April. Countries like Italy, which has massive gold reserves (above $130 billion), he says, could be similarly tempted, driving down prices further Roubini comments..
Reason No. 6: Here he blames some extreme political conservatives, particularly in the U.S. for overhyping gold in ways he considers to have been counterproductive. These ‘fanatics’, as he calls them, have suggested a return to some form of gold standard as being inevitable as they predict hyperinflation may ensue from the Central bank debasement of currency through Quantitative Easing. He goes on to say that given the absence of any conspiracy to expropriate citizens wealth, falling inflation, and what he sees as the inability to use gold as a currency, such arguments cannot be sustained.
For a Professor of economics, some of Roubini’s views are to a large extent simplistic – but then so are some of the views of gold’s strongest promoters. There are some compelling arguments both for and against gold and some of Roubini’s six points are certainly worth taking into account, but one suspects others could be discarded.
Roubini ends by misquoting John Maynard Keynes who did not actually describe gold as a “barbarous relic” but described adherence to a Gold Standard as such. He is not alone in seeing gold as a metal with no intrinsic value and used mainly as a hedge against mostly irrational fear and panic. He does comment, however, that perhaps all investors should have a very modest share of gold in their portfolios as a hedge against extreme tail risks. But, he avers, other real assets can provide a similar hedge, and those tail risks – while not eliminated – are certainly lower today than at the peak of the global financial crisis.
Roubini does perhaps hold a more optimistic view of the state of the global economy than some other commentators. Indeed it is perhaps hard to argue convincingly that the global financial crisis has indeed yet peaked given the seemingly ever deteriorating performance of the Eurozone economies, a pretty flat U.S. economy which could yet move either way and Japan’s nervous take-up of Abenomics. However his thesis is well worth reading, even if you are convinced that Roubini is wrong. There are many out there who would express their views similarly. Gold Bugs know thine enemy.
To read Roubini’s full article, which was written for the Project Syndicate website, click here