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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.
Copyright: Project Syndicate, 2009. www.project-syndicate.org For a podcast of this commentary in English, please use this link: http://media.blubrry.com/ps/media.libsyn.com/media/ps/roubini20.mp3
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Username Password New registration Forgotten password AiriusTorpora 05:26 15 Dec 09The author fails to recognize or examine the point that it may be possible that the current gold price action is actually a hedge by foreign banks against the current rising currency bubble. A contra-position against an existing bubble, is not, itself a bubble.
Duffminster 09:10 15 Dec 09Like most of the mainstream financial press, Roubini appears to me to be reading off a script. He entirely misses the other side of the gold coin. The other issues which are probably more important long term in my opinion are the following:
The first and most important issue is that the monetary precious metals are the only two commodities which, in my opinion, have routinely been price suppressed by central banks and on behalf of the top fiat currency systems. Unlike every other commodity silver and gold have never been allowed to come close to reaching their inflation adjusted highs which they reached shortly after Nixon defaulted (strike that) canceled the last vestige of the US gold standard. While gold is currently in the neighborhood of about half its inflation adjusted high, silver remains at below 1/6th of its inflation adjusted high.
Central banks have been a major contributor to the "Supply" side of the ledger over many years while Gold mining supply has leveled or is declining. In the meantime as central bank hordes have been depleted, central banks on net are no longer contributing to the supply side and have moved to the demand side. So not only are central banks, in aggregate, not supplying gold, they are demanding it, even as miners are facing increasing costs and logistical challenges in recovering gold.
The second point and one the mainstream financial press has studiously avoided for many years is the excellent analytical work of the Gold Anti Trust Action Committee (GATA). GATA has done work that I believe proves that the central banks, including the Federal Reserve have engaged in Gold SWAPS and that many if not most of the largest world central banks played that game along with the US for years as the primary mechanism to keep gold prices suppressed in order to help keep interest rates lower even as very large amounts fiat money and debt and fiduciary media were created. This is based on the work of Summers involving Gibson's paradox as relates to gold and interest rates.
According to my understanding GATA's research, these central banks have accounting rules that allow them to keep swaps off the books and to continue to report the swapped and leased gold as if were still available physical gold. If GATA's analysis is correct, the central banks may have only about half or less of the gold they report. In my opinion, there work is rock solid.
I am looking forward to the day this publication and other mainstream news sources begins interviewing GATA founders like Bill Murphy to finally look at this issue. At a time when the US may pass an "Audit the Fed" bill, I think its about time to hear more on this subject.
As far as today's market action in currencies and Gold and Silver:
Today's Dollar movement is clearly interventional (likely some combination of the US Japan and China and Europe) because the dollar is up and gold and silver are fully under record massive short positions by a small handful of the largest US and UK member banks of their respective central banks and on a day when we are seeing a Surge in Wholesale Inflation. That is a dead giveaway to me.
Additionally, there are many signals in the field showing that sovereign debt is increasingly risky and that debt levels among the largest currency manufacturers is rising as the debts among those in the basket of currencies are all not repayable at current currency valuations (relative to real products and real money gold and silver).
Short term, these central banks can cause these fluctuations but looking outside these fluctuations, the whole basket seems to be less and less safe and as more and more of the wealth begins to realize how the wool is being pulled over their eyes it seems to me very likely that wealth will want to get parked in the safest haven of all and take possession of physical gold and silver while it can still be had.
I have much more to say. If you want to learn more search for silver and gold and
Duffminster
http://www.duffminster.com/SilverandGold
speed7791 06:10 16 Dec 09You said..."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. "
If that is the general thinking of those in the western world I fear that you've not only sealed your fate, but you've sealed your hope as well.
All I can say is... Please sell us all your gold & silver. We'll take them all!!! We in turn will hand you something thats on its way to its intrinsic value.
Warm rgds from Malaysia...
LorenzoInterest 02:48 16 Dec 09Sir,
let's say you're right and gold price is a bubble like other assets around the world because of the reasons you've explained in your article. Wouldn't a burst of these bubbles create the same sort of problems we've faced with the present economical great recession? Wouldn't a burst create pressures on banks balance sheets, governments budgets (because of another recession and likely banking support) and so add a lot of more pressures on monetary and fiscal authorities? Wouldn't that mean that there could be a good reason to hedge all this huge risk with something like gold?
You write gold has no intrinsic value. But we could say that everything has no intrinsic value or that everything has value according to what we need and why we need it. Considering the fact that the gold mined during the Roman Empire is still around us, and considering the huge risk we're facing because of a possible bubble burst or a possible huge inflation escalation, can we say that gold has a value because people want to reduce the risk they're facing? Is there anything better than something which comes out of the beginning of civilization in perfect shape? I don't think so.
You write that in a global economic meltdown it would be better to have guns, canned food and other commodities. That's right. But that doesn't mean you won't need gold at all. Let's assume the world economy is going to implode and all fiat money simply don't exist anymore. Let's assume we all go back to a barter kind of economy. Well that's exactly the time you'll need gold: it would have saved part of your wealth and it would help you to restore a monetary economy out of the shadows of barter. But why? Well because can we say that there is something better than a commodity in perfect shape since the time of Roman Empire, and even before of course, to restore trust in indirect exchanges and build up new capital for further development? No. There isn't.
AUTHOR INFO Nouriel Roubini Nouriel Roubini is professor of Economics at the Stern School of Business, NYU, and Chairman of Roubini Global Economics (www.roubini.com). MOST READ MOST RECOMMENDED MOST COMMENTED Obama in Chains The Gold Bubble and the Gold Bugs The Irresistible Rise of the Renminbi Too Big to Live The Limits of Dubai A New World Architecture Who Needs to Be EU President? Obama in Chains Let A Hundred Theories Bloom Slouching Toward Sanity The American Anti-Intellectual Threat A New World Architecture The Triumphant Return of John Maynard Keynes More Walls to Fall Inflation is Now the Lesser Evil ADVERTISEMENT FIND YOUR SERIES THOUGHT LEADERS Lucian Bebchuk Shlomo Ben-Ami Boskin, Sinn Ian Buruma Davies, Shiller Castaneda, Haass, Rocard J. Bradford DeLong Esther Dyson Barry Eichengreen Fan Gang Martin Feldstein Joschka Fischer Harold James Bjorn Lomborg Yuriko Koike Dominique Moisi Joseph S. Nye Chris Patten Dani Rodrik Kenneth Rogoff Nouriel Roubini Jeffrey D. Sachs Peter Singer Robert Skidelsky Michael Spence Joseph E. Stiglitz Naomi Wolf WEEKLY SERIES The World in Words GLOBAL PERSPECTIVES Earth in the Balance The Human Rights Revolution The Frontiers of Growth Islam and the World INTERNATIONAL INSIGHT Into Africa The Asian Century China Stands Up Europe at Home and Abroad European Economies Latin America A Window on Russia MIND AND MATTER Health and Medicine Science and Society Worldly Philosophers SPECIAL SERIES The Energy Challenge 2008 Year End Series PROJECT SYNDICATE The Unbound Economy Kenneth Rogoff What will drive recovery from the financial crisis of 2008? Will China eventually suffer a Japanese-style hard landing after decades of rapid growth? ...read more Roads to Prosperity Dani Rodrik Is free trade always the best policy? Did the global financial crisis of 2008 prove that developing countries should not open their financial systems? ...read more Anatomy of the Global Economy J. Bradford DeLong Is a new global reserve currency needed? Do central banks need to be reigned in? Will health-care reform help or hinder efforts to control government budgets? ...read more © Project Syndicate 1995 - 2009 How to become a member | Member papers | Support us | About us | Contact usNEW 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.
Copyright: Project Syndicate, 2009. www.project-syndicate.org For a podcast of this commentary in English, please use this link: http://media.blubrry.com/ps/media.libsyn.com/media/ps/roubini20.mp3
You must be logged in to post or reply to a comment. Please log in or sign up for a free account.
You must be logged in to post or reply to a comment. Please log in or sign up for a free account.
The author fails to recognize or examine the point that it may be possible that the current gold price action is actually a hedge by foreign banks against the current rising currency bubble. A contra-position against an existing bubble, is not, itself a bubble.
Like most of the mainstream financial press, Roubini appears to me to be reading off a script. He entirely misses the other side of the gold coin. The other issues which are probably more important long term in my opinion are the following:
The first and most important issue is that the monetary precious metals are the only two commodities which, in my opinion, have routinely been price suppressed by central banks and on behalf of the top fiat currency systems. Unlike every other commodity silver and gold have never been allowed to come close to reaching their inflation adjusted highs which they reached shortly after Nixon defaulted (strike that) canceled the last vestige of the US gold standard. While gold is currently in the neighborhood of about half its inflation adjusted high, silver remains at below 1/6th of its inflation adjusted high.
Central banks have been a major contributor to the "Supply" side of the ledger over many years while Gold mining supply has leveled or is declining. In the meantime as central bank hordes have been depleted, central banks on net are no longer contributing to the supply side and have moved to the demand side. So not only are central banks, in aggregate, not supplying gold, they are demanding it, even as miners are facing increasing costs and logistical challenges in recovering gold.
The second point and one the mainstream financial press has studiously avoided for many years is the excellent analytical work of the Gold Anti Trust Action Committee (GATA). GATA has done work that I believe proves that the central banks, including the Federal Reserve have engaged in Gold SWAPS and that many if not most of the largest world central banks played that game along with the US for years as the primary mechanism to keep gold prices suppressed in order to help keep interest rates lower even as very large amounts fiat money and debt and fiduciary media were created. This is based on the work of Summers involving Gibson's paradox as relates to gold and interest rates.
According to my understanding GATA's research, these central banks have accounting rules that allow them to keep swaps off the books and to continue to report the swapped and leased gold as if were still available physical gold. If GATA's analysis is correct, the central banks may have only about half or less of the gold they report. In my opinion, there work is rock solid.
I am looking forward to the day this publication and other mainstream news sources begins interviewing GATA founders like Bill Murphy to finally look at this issue. At a time when the US may pass an "Audit the Fed" bill, I think its about time to hear more on this subject.
As far as today's market action in currencies and Gold and Silver:
Today's Dollar movement is clearly interventional (likely some combination of the US Japan and China and Europe) because the dollar is up and gold and silver are fully under record massive short positions by a small handful of the largest US and UK member banks of their respective central banks and on a day when we are seeing a Surge in Wholesale Inflation. That is a dead giveaway to me.
Additionally, there are many signals in the field showing that sovereign debt is increasingly risky and that debt levels among the largest currency manufacturers is rising as the debts among those in the basket of currencies are all not repayable at current currency valuations (relative to real products and real money gold and silver).
Short term, these central banks can cause these fluctuations but looking outside these fluctuations, the whole basket seems to be less and less safe and as more and more of the wealth begins to realize how the wool is being pulled over their eyes it seems to me very likely that wealth will want to get parked in the safest haven of all and take possession of physical gold and silver while it can still be had.
I have much more to say. If you want to learn more search for silver and gold and
Duffminster
http://www.duffminster.com/SilverandGold
You said..."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. "
If that is the general thinking of those in the western world I fear that you've not only sealed your fate, but you've sealed your hope as well.
All I can say is... Please sell us all your gold & silver. We'll take them all!!! We in turn will hand you something thats on its way to its intrinsic value.
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