The Great Gold Bubble Debate

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Billionaire financier George Soros is the latest to enter the gold bubble debate, warning that with interest rates low around the world, policymakers are risking generating new bubbles which could cause crashes in the future.

Speaking Thursday to The Daily Telegraph, on the fringe of the World Economic Forum, Soros said: "When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment".

The ultimate asset bubble is gold," he added.

Investors are piling into the metal amid fears both of potential inflation and fading faith about the stability of previously-assumed safe assets such as government debt, Soros told the newspaper.

Having risen around 40% in 2009 and topping US$1,125 an ounce last month, gold has attracted a lot of interest from investors as well as analysts and media pundits trying to predict its future dirction.

Forecasting asset prices such as commodities has never been a precise science. It involves historical precedent, monetary policies, supply-demand balance, fear factors and many other variables.

What constitutes a bubble?

Is it the rate of growth in the last year, regardless of its magnitude? Is it a comparison with historical real values? Is it speculation? Is it Supply and Demand fundamentals? Is it all of the above?

The debate on asset bubbles, especially gold, has been raging for some time, attracting the attention of prominent investors and commentators incuding Nouriel Roubini, calling it a barbaric relic, Jim rogers who in contrast sees gold at US$2,000 within a decade, Marc Faber who sees US$1,000 as a floor and Gold Hand Maktari who had pedicted US$1,200 in 2009.

So, is gold in a bubble?

Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics (RGE), who predicted the current financial crisis said in December the rally in gold prices is developing into a bubble and the precious metal faces "significant risks of a downward correction".

Writing in a research note published by the Financial Times, Roubini said: "The recent rise in gold prices is only partially justified by fundamentals, and is in part a bubble that could easily go bust.

“The recent rise in gold prices is only partially justified by fundamentals, and is in part a bubble that could easily go bust,” warned Roubini in the report provocatively titled: “The new bubble in the barbaric relic that is gold.”

Speaking in an interview with Dave Nadig of Index Universe (IU.com) in October Roubini said: "My view is to stay away from risky assets. Stay in liquid assets".

Roubini said asset prices have gone up as a result of liquidity in the system, however he sees a correction looming.

"I don’t know when the correction is going to occur, it could be a while longer, but eventually it will be a pretty ugly correction, across many different asset classes," he said. "I don’t believe in gold," Roubini added.

Explaining his reasoning, he added: "Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity. So there’s no inflation, and there’s not going to be for the time being".

"The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression".

"So all the gold bugs who say gold is going to go to US$1,500, US$2,000, they’re just speaking nonsense," Roubini said. "Without inflation, or without a depression, there’s nowhere for gold to go," adding maybe it could happen in three or four years from now. "But not anytime soon," he said.

Jim Rogers’s view

In contrast to Roubini, Rogers said the only bubble he sees in the Western world now is in US bonds.

“I cannot conceive of lending money to the US for 30 years,” he said. “Other than that, I don’t see any bubbles going on, unless he knows something the rest of us don’t know.”

Rogers thinks that Roubini is wrong about the threat of bubbles in gold and some other assets.

In an interview with Bloomberg Television last month, Rogers said many commodities are still down from record highs. The price of gold will double to at least US$2,000 an ounce in the next decade, he said.

Roubini replied by saying Rogers’ forecast is “utter nonsense.” “Maybe it will reach US$1,100 or so but US$1,500 or US$2,000 is nonsense,” Roubini said.

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