Gold remains a “barbarous relic,” with no intrinsic value

I recently commented that Gold would likely continue to slide in price due to two reasons gold has lost its shine 1) QE with central banks is keeping inflation very low so gold is not required as a hedge and 2) there is a real fear that central banks who rarely sell big chunks of gold, like Italy, Spain and Portugal, Cyprus, Greece may have to sell off some gold to meet their debt obligations (as the UK did a few years ago)... this will flood the market with excess stock of gold.

So as long as QE continues and as long as these EU countries carry such big debts that have to be paid, all will not be smooth in the gold market.
I always think of gold as a gamble, too many unknown, unknowns. With a company we can make value estimates on the balance sheet, cashflow and profit and loss statements - gold offers none of this so in fact it is not a safe haven just a gamble.

Echoing these sentiments 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.
  • 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.
  • 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.”

Roubini says gold remains a “barbarous relic,” with no intrinsic value, used as a hedge against “irrational fear and panic.” What are your thoughts, will gold rebound or has it lost its shine?



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