EVERYBODY seems to be singing the same song that gold is only going to go up. When I see analysts who are usually like “parrots” all repeating each other it reminds me a bit like the time when everybody was saying that oil will hit $200 and $250 per barrel. Also it reminds me a bit like when all these so-called experts in Saudi Arabia were making calls for our stock market index to go from 20,000 to 30,000.
It reminds me of experts in Japan in the late 1980s when they saw the stock market index going to 35,000 and then forecasting that it would go to 45,000. The Nikkei is now around 10,000 after a strong rally over the past few month and it plausible that it take a few more years before going near 40,000 points. Remember the US Nasdaq before it took a deep dive, everyone was buying and everyone was calling for even higher expectations until it crashed. The housing sector in the US, part of Europe, Japan in the 1990s as well as Dubai more recently have seen a severe price plunges. How many people were calling for housing prices to keep on going up in Dubai based on demand, on expatriates who just moved to Dubai? The same with gold prices today. It seems to me that we are in some sort of a commodity bubble and a gold bubble. Hedge-fund manager Michael Masters last week appeared before the US Senate Agriculture Committee arguing another bubble may be growing and that prices again were being determined by trading desks of large Wall Street firms — and not by supply and demand. Tin prices are up 40 percent since March.
Corn, soybean and wheat futures hit eight-month highs over the past weeks amid heavy fund buying and despite strong supplies in some agricultural markets. That set the stage for creation of a bubble and raises questions about the sustainability of the recent price rise.
What caused the commodity and gold bubble? One of the most important reason is that investors were spurred by near zero US interest rates and easy availability of funds, have borrowed huge sums of money in dollars in recent months to purchase higher-yielding assets in so called “carry trades.
Although there is uncertainty in the global economy about growth, the dollar and inflation, gold prices have been pushed up in a short period of time. Last few weeks I have been hearing analysts expecting gold prices to hit $3,000 per ounce some even higher.
Gold could go up in the long term, over the next decade above the inflation adjust rate (now at $2, 300 per ounce) but before it goes up gold would go down in 2010.
In fact, gold has lost over the past two weeks more than $100. The risk of inflation is used by gold bulls as a justification for people to buy into gold. But if one looks closely at the threat of inflation, one would find that there is very little of that possibility unfolding in 2010. It is difficult to see any inflation pressure in the US building up next year. Unemployment in the US is high and it could be bottoming sooner than expected but it won’t get better anytime soon. People will be scared to buy and those who have jobs will not spend much. Factories in the US have very low capacity utilization (70.7 percent) when in the boom years capacity utilization was at it’s maximum. Interest rates in the US should remain at current levels for at least half of 2010, if not for more. The Fed is concerned about growth not so much inflation. So where is the inflation threat? What goes on in the US I see happening in Europe as well. Not much of an inflation risk there as well. Germany, France, the UK, are struggling to get their economies to pick up the pace of growth. So is there another reason besides inflation that the gold bulls are looking as a reason for people to buy gold? Always, it is uncertainty. For most of last year, the buying of gold was mostly physical and now it is clearly financial-market driven through derivatives, futures, over-the-counter transactions. There are those gold bulls that would argue for straight out bullion purchases. There are those who say that it’s better to have gold bars and gold coins in case the global economy is destabilized. If we do end up in a world where we have to rely on physical gold to do our transactions the global economy would be in a catastrophic situation. This argument is like the one used by those who were selling nuclear bunkers in the US during the 1960s. The fear in the US was that there could be a nuclear war and contractors and businessmen sold to people who were fearful of a nuclear war the idea of building nuclear bunkers in some homes. The question that few posed was that even if there was a nuclear war and some people were saved because they went to their nuclear bunker at home and survived for months by eating and living inside that bunker, would they survive the nuclear winter that would wait them after they exited their bunkers?
Fear like greed motivates humans. It will always be there but we don’t have to abuse it to its fullest.
And what about the central banks that were interested in buying more bullion? Officials from two of the central banks widely assumed to be enthusiastic buyers of gold (China and South Korea) are reported to have said that prices are now too high.
However, I still think that prices are more likely to fall than rise next year, and I’m sticking with my forecast that gold will average less than $1,000 an ounce in 2010. Also the dollar will continue to recover some more ground next year as worries about the inflationary impact of unconventional monetary policies fade and the dollar regains some of its safe haven appeal. Gold prices are then likely to fall back too. Indeed, even after the recent falls, gold still looks expensive relative to the dollar, based on the relationship between the two over the last several years.
(John Sfakianakis is chief
economist at Banque Saudi Fransi, Riyadh.)
