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A good part of this rise in gold prices is driven by a bubble.
This entry was posted in Finance, Financial Markets, The Global Economy and tagged bubble, bubbles, Finance, Financial Markets, gold, gold bubble, gold price, gold prices, Nouriel Roubini, US dollar, US economy. Bookmark the permalink.
One Response to A good part of this rise in gold prices is driven by a bubble.
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Zero Hedge has posted some excerpts:
http://www.zerohedge.com/article/roubini-blasts-barbarous-relic-recommends-spam-over-gold
Roubini has to look at historical numbers a little more and not rely on anecdotal evidence related to gold’s behavior during 2008, or gold’s behavior during periods of disinflation where yields were high.
1) Roubini assumes that gold cannot go up during deflation. This is not what history shows, and to the extent that gold is monetized, it can go up during deflation. The trend of central bank gold purchases suggests that gold is being re-monetized.
2) It is true that prolonged dollar strength and rising rates could kill gold, but if growth is low, when will rates rise? How much?
3) Likewise, real rates of return describe the historical performance of gold better than inflation alone. Therefore, if you expect low growth (Roubini?), you expect low rates. When real rates are low, people find holding a relatively useless metal acceptable and gold does well. Note also that the relative strength of gold in euro terms could be explained by the rate differential.
4) It is true that bouts of risk aversion (illiquidity would be more precise, actually) may drop gold, but this just tells you about gold’s volatility, not about its long-term direction.
5) The bit about stockpiling canned food is the oldest quip in the book of pseudo-sagacious anti-gold-bug talking points. People don’t hold gold because they are expecting armageddon. They hold gold because they are expecting low real rates of return, or because it is money, when it is.
See related points here:
http://www.wiserthanthecrowd.com/2009/12/inflating-away-debt.html?showComment=1260575496285#c1147183406791768773
Gold will probably continue lower next week. I will probably re-buy what I sold as it approaches the 1050 Indian Central Bank level.