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.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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