Gold prices have been rising rapidly, breaking the $1,000 barrier and in recent weeks heading towards $1,200 an ounce and above, but this may not last long, writes economist Nouriel Roubini.
In his syndicated column, the NYU professor, and former Clinton White House economist, reports that 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,” writes Roubini.
Gold prices started to rise in the first half of 2008, when emerging markets were overheating, commodity prices were climbing, and there was worry about rising inflation in high-growth emerging markets.
“The second price spike occurred when Lehman Brothers collapsed, leaving investors scared about the safety of their financial assets – including bank deposits,” writes Roubini.
“That scare was contained when the G-7 committed to increase guarantees of bank deposits and to backstop the financial system.”
There are a number of reasons why gold prices are rising, but they hint at only a gradual rise with significant risks of a downward correction, rather than a rapid rise towards $2,000, as today’s gold bugs claim, Roubini reckons.
“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,” says Roubini.
“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, some reports confirm Roubini’s theory.
The Globe and Mail, the Toronto-based daily, reports that the Indian central bank is pulling back on its gold purchases.
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