THE 5 REASONS GOLD IS IN A BUBBLE AND AT RISK OF SIGNIFICANT CORRECTION
Nouriel Roubini recently published a report claiming that gold is now in a bubble and at significant risk of a major correction (an opinion I had when gold was 10% higher and continue to maintain). He says the bubble is being driven by 5 primary factors:
- Inflation concerns are driving up gold prices as monetary policy exacerbates fears over the dollar.
- A “massive wall of liquidity” is chasing asset prices.
- The carry trade and diversification out of the USD.
- Global supply of gold can’t keep pace with rising demand.
- Sovereign risk is again on the rise.
While these powerful trends are widely considered to continue in 2010 (and help boost gold prices further) Roubini is less optimistic. He sees 5 substantial risks that will keep gold from reaching the $2,000 price target many analysts (see the bullish outlook for gold here) and goldbugs have attached to the yellow metal:
- An unwind in the carry trade would be devastating for gold and the reflation trade.
- Central banks will be forced to implement an exit strategy soon.
- Any bout of economic weakness will send investors fleeing into dollars.
- Investors are chasing performance and causing a bubble in gold. All bubbles crash and this bubble in gold will be no different.
- Fifth, the effect of rising sovereign risk on gold prices is ambiguous, as the events of recent weeks suggest.
Roubini concludes that gold bugs are “wrong” to assume the price surge will continue. He says gold has no intrinsic value and is therefore not rising on fundamentals. Investors should be wary of chasing the yellow metal at this point.
Source: www.roubini.com
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
Follow Me:
11 Comments
“■ An unwind in the carry trade would be devastating for gold and the reflation trade.”…
Wouldn’t an unwind of the carry trade be devastating for pretty much everything? Why is he so fucused on only gold here? Wouldn’t stocks, copper, oil, and damn near eveything get hit?
I find it hard to believe that people find it hard to believe that gold couldn’t go to $2,000.00. Maybe it will, maybe it won’t, but we are talking about the same world where people were willingly paying $1,200.00 per share of common stock for JDSU, where people were paying 750-1000 per square foot for run down shacks, and where people regularly pay buffoonish prices ‘high end’ anything.
I believe Mr. Roubini is wrong. When he says gold has no intrinsic value I have to ask, what intrinsic value does paper currency have? It seems to me Mr. Roubini is no more that a paper bug.
I’ve never quite understood the whole intrinsic value argument. There are lots of things in this world with no intrinsic value and yet people pay thousands or millions of dollars for them.
talk about losing luster,with the U.S. printing and borrowing machine cranking up to a fever pitch, fleeing to safety will increasingly be to gold.
what does he really think that green paper will represent before long?……the answer is RED INK, which doesn’t count for alot of confidence.no confidence,no value.
we are now great britian at the end of the 19th century.we no longer produce anything on any major scale(our own houses the last manufacturing sector to die).
manufacturing is the only way you add value to an economy.a bunch of services chasing each other around in a circle does not do it.
gold takes a breather here and resumes its bull market.the last fleeting temporary turn to the dollar in april when isreal, pushed to the brink of being vaporized, bombs iran.
then continues up,with the US in the grips of 70′s style stagflation.
don’t even get me started on the prospects of obama HAVING to devaluate the dollar,his only stick for the chinese.but thats only if he can figure out what you use a stick for.
Roubini will be proven dead wrong in my opinion. Gold is most definitely not a bubble. It amuses me that there is so much talk about a gold bubble, just because gold has gone up 20%, breaking out of it’s $1000 trading range. A 20% move is hardly bubbly. Gold is still 50% below its inflation adjusted high of 1980. This is just the beginning of the currency crisis heading our way. Gold is a powerful indicator and is warning us of this. The Fed will definitely not raise rates or mop up the massive liquidity- especially not with this level of debt burden. They simply cannot afford it…literally. And Obama’s talk of another stimulus shows the government doesn’t believe the economy is on the mend. China’s cutting back on treasury purchases. Money printing is the only option. And it will accelerate. Gold still has a long long way to go.
Gold is way too under-owned to be a bubble. It will see hot/fast trading money moving in and out and will be very volatile. But clearly central banks are accumulating (china said as much, as discussed here last week).
If Gold was 60% of most portfolio’s like stocks are, then I would be concerned about a bubble. I don’t know what the number is but I would hazzard that most people/institutions don’t even have an allocation to gold.
Technically, most stocks do not have any intrinsic value. What exactly does a share represent? A small percentage of a company. Yet, unless it pays dividends, there is nothing tangible about it that has value except that people view it as a vehicle to buy and sell. It’s exactly the same as a baseball card. The better an athlete performs on the field, the more their rookie baseball card will be worth. I’m sure Tiger Woods’ rookie card took a hit in the sports trading card markets over the last few weeks.
If the stock pays a dividend I can see how people could be interested in buying and selling those (for future increased dividends). But without dividends, you’re basically holding onto a baseball card for a company and hoping someone else will find that more attractive and buy it from you. It’s literally the Greater Fool theory.
Since most shares do not pay dividends, most of the stock market has no “intrinsic” value. It’s exactly like gold. Roubini can say that gold doesn’t have any intrinsic value, but neither does most stocks, it’s really just humans putting value on it. So his argument that you shouldn’t trade gold because it has no intrinsic value really makes no sense. The reason why we trade gold in these circumstances is because that is the accepted protocol between traders. You can’t argue that you shouldn’t trade gold because it has no intrinsic value, because if you scratch through the surface, neither does (most) stocks.
Don’t really understand Roubini’s scepticism about gold, myself.Maybe he knows something we don’t. A lot of gold out there is really fake according to an article I read about the IMF ‘gold’ sales to India. But evenso one would think that real gold would count for something.
The danger of significant correction is not because of 5 reasons Mr. Roubini laid out, but is just because people are unanimously bullish. Look at youself guys, everyone seems understand fundamentals and every comment gets five stars. This alone should alert every gold bull.
look at chart it is more dangerous than most realize. tremendous selling at 1200, if we don’t get a quick snapback rally from this level, I would be very concerned about uptrend from September.
I love reading negative news like this….As a contrarian indicator, it means a good percentage of paper bugs also believe this..which means the current gold correction makes it a great buying opportunity. The mainstream financial media were calling gold’s top at $500 back in 2006 and the bears were out in force after the sell off at $650. It’s possible to drop further from here in the short term, but it looks like $1000-1100 USD is the new floor. Ask yourself this question whether gold goes up or down “x” number of dollars: over the past year/decade/century what would you prefer to hold as a store of value–gold or Federal Reserve notes? Don’t let the banksters get your gold as volatility tries to shake you off the golden bull! Use every $20 drop as a buying opportunity until technical levels break down. They haven’t!
“Gold has no intrinsic value.”
Cool. Send me all you got…better yet, just let me know where to meet you and I will bring a truck and take all that worthless metal off your hands. What a stupid statement.
As to whether this ‘bubble’ will burst, I hope it does as he predicts because it means I will be able to pull more real money into my hands with the dollars I have. Which is the more surer millionaire: a person with a million dollars, a person with a million ounces of silver, or a person with a million ounces of gold? Which person’s assets can be more easily inflated away? Which person’s assets are more easily seized by judicial decree if the location is not published? (Yar, I know that last has a few problems, but I still think I will stick with it for now.)
Buying on dips is a good plan and the bigger the dip the better. Sooner or later people will insist on money instead of paper in exchange for goods and services.
As to all the economists and 12 inch forehead fellows out there who disagree with this as simplistic, my response is this: You are the fools who gutted this economy based on an algorithm (or derivative function) developed by some Chinese national you thought eliminated all risk. Who’s the bigger fool?