INTERNATIONAl. 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$1,225 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 a good understanding of historical precedents, monetary policies, supply-demand balances, fear factor taht drives investors 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 linked to 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.
Jim Rogers reaffirmed his view that gold will reach US$2,000 an ounce over the next decade as government's money printing will lead to higher prices and, on the supply side, no new mines have been opened for decades.
In a recent interview with wallstcheatsheet, Rogers, explaining the variables that will push gold higher, said: "It’s very clear there is huge suspicion about paper money around the world. This suspicion is gathering steam. Governments are printing huge amounts of money. This has always led to higher prices. Maybe I am wrong and it’s different this time. But I doubt it".
Additionally, no new large gold mines have been opened in decades, Rogers said, adding that "some of those mines are over 100-years old and...are all depleting".
The legendary investor also said central banks have huge Gold reserves above ground — and they are less interested in selling than in the past.
"If you adjust Gold for inflation and go back to its former all-time high in 1980, Gold should be over US$2,000 an ounce right now if you want to say it’s reaching new inflation adjusted all-time highs," he said.
"I suspect that given all the money printing in the world, we will see much higher prices for hard assets," he added.
Earlier this week Robert Prechter of Elliott Wave told CNBC that this is perhaps the last chance to get out of stocks with the DJIA “in quintuple digits.” He also believes that stocks will fall below the March 2009 lows.
Prechter, agreeing with Roubini's view, believes that if deflation comes, gold could see a 40% drop from its peak. He feels gold is overbought and starting a new bear move there anyway.
Marc Faber the Swiss fund manager and Gloom Boom & Doom editor said Gold won’t fall below US$1,000 an ounce again as central banks print money to help fund budget deficits.
Speaking at a conference in London on last month, Faber said: "We will not see less than the US$1,000 level again".
"Central banks are all the same. They are printers. Gold is maybe cheaper today than in 2001, given the interest rates. You have to own physical gold."
Gold prices having held above the upside breakout, Faber now sees the US$1,000-mark as the new floor.
China will keep buying resources including gold, he said.
“Its demand for commodities will go up and up and up,” he added. “Emerging economies will grow at the fastest pace.”
The arguments for or against gold beeing in a bubble seem compelling. "This, in our opinion calls for a short term consolidation period where bulls and bears fight it out within a narrow range of US$1,050-US$1,150, says a research note from Stategy Garden, the publishers of BI-ME.
The report sees a period of high volatlity in 2010 on exceptional circumstances and uncertainties about the strength of the recovery and the effect of exiting stimulus activities.
Gold Hand Maktari
The potential volatility in gold prices in 2010 is also shared by one of the most astute forecasters of bullion prices, Gold Hand Maktari.
In a recent email statement received by BI-ME, Gold Hand Maktari says "2010 will see a roller coaster ride with the gold market, thanks mainly to the gradual stability of the global economy and the US Dollar rising and falling to new highs and lows throughout the year."
The statement, whose source could not be verified by BI-ME, said: "Gold could reach new highs of up to US$1,600 plus per troy ounce in 2010 and set an all time high once more however, due to the global stabilization of the world economy, we will in no doubt see gold plummet. I see gold dropping at some point after heavy gains, to and around the US$900 mark, and dont be surprised at all if it falls further."
"2010 is a time to be very cautious especially as the economic outlook seems to be improving. 2010 will see an average gold price of US$1,150-US$1,190."
"We all predict prices to reach a certain high or low in the coming months or years and few are ever correct however, as I stated in 2008 and 2009, we would see gold reach up to US$1,200 by the last quarter of 2009, few would have seen that on the cards," the 'Maktari' statement said.