Roubini’s Latest Project Syndicate Op-Ed: The Gold Bubble and the Gold Bugs
From Project Syndicate:
NEW YORK – Gold prices have been rising sharply, breaching the $1,000 barrier and in recent weeks rising towards $1,200 an ounce and above. Today’s “gold bugs” argue that the price could top $2,000. But the recent price surge looks suspiciously like a bubble, with the increase only partly justified by economic fundamentals.
Gold prices rise sharply only in two situations: when inflation is high and rising, gold becomes a hedge against inflation; and when there is a risk of a near depression and investors fear for the security of their bank deposits, gold becomes a safe haven.
The last two years fit this pattern. Gold prices started to rise sharply in the first half of 2008, when emerging markets were overheating, commodity prices were rising, and there was concern about rising inflation in high-growth emerging markets. Even that rise was partly a bubble, which collapsed in the second half of 2008, when – after oil reached $145, killing global growth –the world economy fell into recession. As concerns about deflation replaced fear of inflation, gold prices started to fall with the correction in commodity prices.
The second price spike occurred when Lehman Brothers collapsed, leaving investors scared about the safety of their financial assets – including bank deposits. That scare was contained when the G-7 committed to increase guarantees of bank deposits and to backstop the financial system. With panic subsiding towards the end of 2008, gold prices resumed their downward movement. By that time, with the global economy spinning into near-depression, commercial and industrial gold use, and even luxury demand, took a further dive.
Gold rose above $1,000 again in February-March 2009, when it looked like most of the financial system in the United States and Europe might be near insolvency, and that many governments could not guarantee deposits and backstop the financial system, because banks that were too big to fail were also too big to be saved.
That panic subsided – and gold prices started to drift down again – after US banks were subjected to “stress tests,” America’s Troubled Asset Relief Program further backstopped the financial system by removing bad assets from banks’ balance sheets, and the global economy gradually bottomed out.
So, with no near-term risk of inflation or depression, why have gold prices started to rise sharply again in the last few months?
There are several reasons why gold prices are rising, but they suggest a gradual rise with significant risks of a downward correction, rather than a rapid rise towards $2,000, as today’s gold bugs claim.
First, while we are still in a world of global deflation, large, monetized fiscal deficits are fueling concerns over medium-term inflation. Second, a massive wave of liquidity, via easy monetary policy, is chasing assets, including commodities, which may eventually stoke inflation further. Third, dollar-funded carry trades are pushing the US dollar sharply down, and there is an inverse relation between the value of the dollar and the dollar price of commodities: the lower the dollar, the higher the dollar price of oil, energy, and other commodities – including gold.
Fourth, the global supply of gold – both existing and newly produced – is limited, and demand is rising faster than it can be met. Some of this demand is coming from central banks, such as those of India, China, and South Korea. And some of it is coming from private investors, who are using gold as a hedge against what remain low-probability “tail” risks (high inflation and another near-depression caused by a double-dip recession). Indeed, investors increasingly want to hedge against such risks early on. Given the inelastic supply of gold, even a small shift in the portfolios of central banks and private investors towards gold increases its price significantly.
Finally, sovereign risk is rising – consider the troubles faced by investors in Dubai, Greece, and other emerging markets and advanced economies. This has revived concerns that governments may be unable to backstop a too-big-to-save financial system.
But, since gold has no intrinsic value, there are significant risks of a downward correction. Eventually, central banks will need to exit quantitative easing and zero-interest rates, putting downward pressure on risky assets, including commodities. Or the global recovery may turn out to be fragile and anemic, leading to a rise in bearish sentiment on commodities – and in bullishness about the US dollar.
Another downside risk is that the dollar-funded carry trade may unravel, crashing the global asset bubble that it, together with the wave of monetary liquidity, has caused. And, since the carry trade and the wave of liquidity are causing a global asset bubble, some of gold’s recent rise is also bubble-driven, with herding behavior and “momentum trading” by investors pushing gold higher and higher. But all bubbles eventually burst. The bigger the bubble, the greater the collapse.
The recent rise in gold prices is only partially justified by fundamentals. Nor is it clear why investors should stock up on gold if the global economy dips into recession again and concerns about a near depression and rampant deflation rise sharply. If you truly fear a global economic meltdown, you should stock up on guns, canned food, and other commodities that you can actually use in your log cabin.
18 Responses to “Roubini’s Latest Project Syndicate Op-Ed: The Gold Bubble and the Gold Bugs”
villager • December 23rd, 2009 at 1:43 pm
I appreciate that the Economonitors continue to have free access. Thank you very much. As a retired practioner, I could not otherwise follow the analytical and policy insight.
Guest • December 23rd, 2009 at 1:57 pm
First?
Winston Smith • December 23rd, 2009 at 4:29 pm
I would like to second that appreciation for free access to this forum and the Economonitor, our hosts.”The signs of the prophets are written on the subway walls”"Change does not roll in on the wheels of inevitability, but comes through continuous struggle. And so we must straighten our backs and work for our freedom. A man can’t ride you unless your back is bent.”-Martin Luther KingProtest on Jan 20, 2010 in San Francisco in front of the front of the Federal Building for a Where’s Our Change demonstration, if you’re in the neighborhood.
tutterfrut • December 23rd, 2009 at 4:37 pm
Nope, beaten by the village doc.Once you’ve found out what you can read and where to find it in this new format, it really shouldn’t be too hard to be the next ‘first’ of a handfull of commenters that’s left….
Average Jane • December 24th, 2009 at 9:21 am
Happy holidays to all. And thank you to Prof. Roubini for keeping the blogs available to hoi polloi like me.
wawawa • December 24th, 2009 at 12:32 pm
Ok Mr Roubinin explain this.Report by Sprott Asset Management (Read the Report) infers that there are PHANTOM buyers of US Treasury that can not actually be identified.Really, is there enough money in the world to buy all of new enormous debt issued by US Gov.? Somebody is cooking the books.Looks like that central banks in the world are printing money and lending each other the money to buy each oterhs treasury bonds.IS NOT THAT A CASE FOR GOLD ?http://www.zerohedge.com/article/sprott-calls-fed-ponzi-scheme-half-trillion-treasury-purchasers-are-unaccounted
wawawa • December 24th, 2009 at 1:02 pm
Type the above link in the URL window and it will come up. Do not copy & paste.
11b40 • December 24th, 2009 at 2:44 pm
I read that article and a lot of the commentary that followed. Very concerning, but not shocking. It’s a pretty lively bunch over at zero hedge, & as one of them said, he is getting used to the feelings of nausia. It really is sickening.Independent Contractor
blindman, merry merry..and bright. • December 25th, 2009 at 8:35 am
http://www.nytimes.com/2009/12/24/business/24trading.html?_r=1&scp=2&sq=goldman%20sachs&st=cse.Banks Bundled Bad Debt, Bet Against It and WonBy GRETCHEN MORGENSON and LOUISE STORYPublished: December 23, 2009.In late October 2007, as the financial markets were starting to come unglued, a Goldman Sachs trader, Jonathan M. Egol, received very good news. At 37, he was named a managing director at the firm.Right, William P. O’Donnell/The New York TimesOne former Goldman salesman wrote a novel about the crisis. A Deutsche Bank trader passed out T-shirts for investors hoping to profit on a housing bust.Left, Treasury Department; Kevin Wolf/Associated PressLewis Sachs, left, who oversaw C.D.O.’s before becoming a Treasury adviser, and John Paulson, whose company profited as the housing market collapsed..Mr. Egol, a Princeton graduate, had risen to prominence inside the bank by creating mortgage-related securities, named Abacus, that were at first intended to protect Goldman from investment losses if the housing market collapsed. As the market soured, Goldman created even more of these securities, enabling it to pocket huge profits.Goldman’s own clients who bought them, however, were less fortunate.Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc., an investment company whose parent firm was overseen by Lewis A. Sachs, who this year became a special counselor to Treasury Secretary Timothy F. Geithner….“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”…..
Claude • December 25th, 2009 at 4:30 pm
I’ve followed the determinants of Gold prices during the inflationary 70s and the deflationary 2000s.With all due respect, Prof. Roubini, the only factor that pushes up Gold prices up is negative or low Real Fed rates (less than 2.0 % real Fed rates).Everything else is of secondary importance. To verify this simple assertion anyone can easily plot Gold prices against Real Fed rates.Claude
Octavio Richetta • December 25th, 2009 at 6:02 pm
Merry Xmas to all!The following Achuthan interview is MUST READ MATERIAL. I agree 100% with his views on the recovery for the next six months. He is very clear in saying he does not know what comes later but if you expect a DD in the next few months you are going to be disappointed. His explanation on unemployment, consumer spending dynamics, and inflation, IMHO, deserve an A+ grade. If he were alive today, Moore would be very proud of his student!http://www.businesscycle.com/news/press/1665/Achuthan provides great insights into ECRI’s leading indicators that go beyond the ones they make public. Some people pay big bucks for this.From all the reading and reflecting I have done i the last couple of weeks, I have come to the conclusion that the big scare I had before T day was a mistake, even though there was data to support it such as Dubai, etc. Data around turning points is very noisy but the world’s recovery locomotive is churning along.It may not be a strong/long recovery but it will be a recovery for the next three, very likely six months. The short term forecast by Achuthan and Kaisrel are, IMO, the best ones out there. Kasriel’s latest is also a must read:http://www-ac.northerntrust.com/content//media/attachment/data/econ_research/0912/document/GlobalOutlook2010.pdfAlso watch the nice video in this page (Waking up on recovery):http://www.northerntrust.com/pws/jsp/display2.jsp?XML=pages/nt/0601/1138283678319_6.xml
PeterJB • December 25th, 2009 at 6:27 pm
“But, since gold has no intrinsic value,”@ RoubiniRespectfully, but er, attempted authoritative declaration, coming from an institutionalized, faith-based religiousized profession of superstitiously entrenched peddlers of true-believing unfounded dogma, and ideology, that is “economics” (as it is practised by “leadership” and its entrails) to make this statement is obviously the ‘desperation-moment’ in the collapsing temple of economics that clearly indicates yet another waste of human consciousness in ideological babble.Gold, is the innate qualitative and full complete symbol (noun) and hence expression (verbe) of life itself, in terms of those Universal Principles expressed as Parochial Principles on this, our planet, Earth, and while wielded by the source, that is, the core of the engine of civilization seeking pioneering forces of humanity (commonly called by the ever-faithful as ‘main street’), of all socio-economic energy clearly indicates their lack of confidence, that “leadership” today has any of the intellectual attributes, moral authority, ethics and or interest, etc., etc., to govern in the interests of those purportedly represented, or IOW, to “govern” in an appropriate manner of integrity, courage, and responsibility – as duly mandated by charter. A basic lesson here is to be found in the first three Laws of Thermodynamics, which of course, are conveniently ignored as all facts are overlooked by the priests of “the” faith (du jour).I, Sir, reject your claim on the basis that it is truly false, unfounded and unlearned.Ho humand Seasons Greetings to all
blindman, merry merry..and bright. • December 25th, 2009 at 9:54 pm
http://onlinejournal.com/artman/publish/article_5397.shtml.Happy holidays from America’s banksBy Michael WinshipOnline Journal Contributing Writer.Dec 21, 2009, 11:18….Afterwards, Obama said, “The problem is there’s a big gap between what I’m hearing here in the White House and the activities of lobbyists on behalf of these institutions or associations of which they’re a member up on Capitol Hill.”That’s putting it mildly. Last week, the American Bankers Association sent out an update and “call to action” memorandum crowing over its success watering down the bank reform bill that was approved by the House and urging its members to beat back similar legislation in the Senate. Self-righteously, it concludes, “As one of your New Year’s resolutions, please vow to do everything in your power to show, and to have your colleagues in your bank show, your Senators the right path to true reform.”It helps when the right path is paved with silver and gold. As “Crossing Wall Street,” a November report from the Center for Responsive Politics notes, “The finance, insurance and real estate sector has given $2.3 billion to candidates, leadership PACs and party committees since 1989, which eclipses every other sector . . .“The financial sector has also been a voracious lobbying force, spending an unprecedented $3.8 billion since 1998, while sending an army of lobbyists to Capitol Hill to make its case. That’s more money than any other sector has spent on influence peddling. Not even the health care sector, which spun up a lobbying frenzy this year over health reform, has spent more.”The banks are making a list and checking it twice. And lest we forget, during his run for the White House, the finance sector filled Barack Obama’s stocking with $39.5 million dollars worth of campaign contributions, more than any other presidential candidate.God bless us, every one!.comment: some call it reform. or call to arms, or money inthe bank, or babel, or law, or verbally mediated lobotomy…http://www.zerohedge.com/article/how-bankers-stole-christmas.How the Bankers Stole Christmassmartknowledgeu’sSubmitted by smartknowledgeu on 12/25/2009 00:35 -0500…”Should the people choose to understand “How the Bankers Stole Christmas”, the inevitable massive increase in crime that will accompany the sinking of the middle class into poverty can be avoided.” …..
Pecos Banker • December 25th, 2009 at 10:39 pm
Claude, this is the most interesting thing I’ve heard about gold all year. Would you know where to find a graph of Real Fed rates? I would love to see the gold price plotted on the same graph.
Average Jane • December 26th, 2009 at 5:54 pm
Employees at United Health were told in a mass e-mail recently to write to their elected representatives and inveigh against any type of health insurance reform. If they actually decided to do so, the employees were encouraged to send a copy of their submission to the company’s HR department (perhaps for the personnel file)?I find this to be utterly appalling.
Guest • December 27th, 2009 at 11:12 pm
I find the gold bubble claims humorous.Wow, what a mania gold has become. Look at that parabolic, stair-step explosion in the recent price. Those gold stocks are out of this world. Everybody you know is telling you to get into gold. What a bubble!
Sean • December 28th, 2009 at 2:24 pm
Wow! I have not login for monthsss and this site has changed completely.So where are London Bankers and Miss America? Are they still posting comments here or have a new blog? Last I know MA has a new blog on Roubini site, as well as London Bankers.Are they still giving out forecast and estimtes for stock market and various asset classes? Thanks Guys!
Phillip Thomae • June 10th, 2011 at 9:02 pm
enormous chart you gain
