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  • Roubini: Why gold, ‘that barbarous relic,’ will trade below $1,000 by 2015



    The week could be a big one for gold GCQ3 -0.40% . If Friday’s key payrolls data disappoints in some fashion, then many may relax on the idea the Federal Reserve will pull back on its bond-buying program. And that could be supportive of gold’s view as an inflation hedge against a weak dollar.

    But that’s not the whole story for gold, which is also up against some bearish investor flows. Barclays analysts point out the latest CFTC data shows a big fall in long positions on gold, while short positioning is on the rise. And while physical demand has been strong, from China and India for example, exchange-traded outflows are still a problem, the strategists note.

    Enter the latest big bear view on gold.

    Nouriel Roubini, an economist affectionately known as Dr. Doom, laid out a six-point case over the weekend as to why the gold bubble has burst and it will be under $1,000 by 2015. The metal dropped 5.4% in May — dropping seven out of the last eight months — and is lolling under the $1,400 level.

    Here’s a recap of Roubini’s six-point case, in his piece for Project Syndicate:

    Gold spikes in times of serious economic, financial and geopolitical risks — think “financial Armageddon.” But that doesn’t make it such a safe investment, says Roubini, noting sharp falls in gold prices during crisis periods of 2008 and 2009.
    Gold performs best in times of high inflationary risks, as its popularity grows under the view that it is a hedge against inflation.  But even after aggressive monetary policy by central banks, he says, global inflation is low and dropping further, and commodity prices are adjusted downwards.
    Gold provides no income. With equities, you get dividends; with bonds, coupons and with property, rent. Now that the global economy is recovering, other assets are providing higher returns — so who needs gold, which has “vastly” underperformed since early 2009 versus stocks, he asks.
    Real rates are headed higher on the view that the Federal Reserve and other central banks are going to back out of quantitative easing and zero-policy rates. “The time to buy gold is when the real returns on cash and bonds are negative, and falling,” and that’s not now, he says.
    Highly indebted sovereigns are not pushing investors towards gold and away from their bonds. In fact, many of these governments have high stocks of gold, which they may dump to cut debt. Italy, for one, could be tempted to pare back on its huge holdings.
    Political conservatives in the U.S. have hyped gold so much that it’s become counterproductive. “For this far-right fringe, gold is the only hedge against the risk posed by the government’s conspiracy to expropriate wealth,” he says.
    Roubini says gold remains a “barbarous relic,” with no intrinsic value, used as a hedge against “irrational fear and panic.” But investors can get their hedge against extreme tail risks — which have come way down — elsewhere.  (See also: No gold trader should ignore these odds.)

    Last week, famed investor Jim Rogers said the gold correction wasn’t going to end until more people were scared, noting it’s had an “abnormal” 12-year run. And investment banks have been paring back on their gold forecasts since the metal started falling out of bed last April. J.P. Morgan is among the most recent.


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