Wednesday, June 5, 2013

Price of gold below $1,000 says Dr. Doom

Price of Gold in the last five years.
That's almost half the value that gold had since its peak in 2011!
This is according to Dr. Doom, aka Nouriel Roubini in an interview with Project Syndicate. He expects that this price drop will be caused by 'extreme political conservatism' particularly within the United States.
Between 2009 and 2011, the gold price has more than doubled. According to the founder of Roubini Global Economics, a number of factors will ensure the return of the gold price to the 2009 levels. What can we learn from his wisdom?

These are the factors that might lower the price of gold even further, according to Roubini.

Lack of inflation

A lack of inflation is one of the factors that drives lower gold prices. Thanks to quantitative easing the money reserves are doubling or tripling in leading economies, which automatically causes prices to decline worldwide, according to Roubini.

No income

Another reason for the decline is the fact that gold does not provide an income. And especially now, when world economies are recovering, trading stocks and real estate yield high results for traders.

Low bond yields

Roubini argues that low bond yields were the driving factor behind rising gold prices. According to Roubini, quantitative easing has led to extremely low yields on government bonds after they've been adjusted for inflation. This lead to more gold buying by traders.
With the expectation that the real interest rate will rise as the global economy continues to improve and the central banks will stop printing money, Roubini believes that the low interest rates on government bonds will no longer support the gold price.

Gold reserves governments

The last problem with gold, according to Mr. Doom, are the gold reserves of governments. He gave an example that gold prices fell 13% in April in merely one day after reports that Cyprus would sell some of its gold reserves - totaling $ 400 million
Countries such as Italy which have much larger gold reserves - more than $ 130 billion - could be lowering the price of gold in the same way - states Roubini.

Although I'm not a big fan of Roubini, he may have a point here. Especially the last part. Countries like Spain, Portugal and Italy for example have tremendous amounts of gold. They may sell this gold if the situation in the respective country gets too sour. If the spot price of gold stays below $1400 I'll consider a short.

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