Monday, June 17, 2013

After Gold Bubble Burst!



The soaring price of gold in recent years in early 2009 it was $800 and it reached more than 1900 dollars an ounce in fall 2011 - had all the characteristics of a bubble. And now, like any soaring prices of disconnected assets fundamentals of supply and demand, this gold bubble deflates. At the height of the outbreak, mad gold - a paranoid mixture of investors and others whose political agenda is determined by fear - happily predicted the price of gold on the order of 2000, 3000 or even 5000 dollars an ounce within the next few years. But the price has been declining since. In April, gold was at about $ 1,300 an ounce - and its price continues to trade under 1400 dollars, a drop of nearly 30% from its 2011 high. Many reasons can explain the bubble burst, and why the price of gold will probably fall further to stabilize at around $ 1,000 an ounce in 2015. First, the price of gold tends to buckle when serious economic, financial risks, and geopolitical threat to the global economy. During the global financial crisis, even the safety of bank deposits and government bonds was doubted by some investors. If there is concern of a financial Armageddon, it really is time metaphorically in his bunker to store weapons, ammunition, canned and gold bullion. But even in this terrible scenario, gold would be a poor investment. Indeed, at the height of the global financial crisis of 2008 and 2009, gold prices have collapsed several times. In an acute credit crunch, leverage purchases of forced sales or leads, because any price correction triggers margin calls. Gold can be very volatile - up or down - at the height of a crisis. Secondly, gold performs better when there is a risk of high inflation, insofar as its popularity as a store of value increases. But despite an aggressive monetary policy by many central banks - successive rounds of quantitative easing have doubled and even tripled the money supply in most advanced economies - the overall inflation is still low and steady decline.

 The reason is simple: when the monetary base explodes, the velocity of money slows as a result of the accumulation of liquidity by banks as excess reserves. The reduction of public and private debt keeps growing global demand below that of the offer. Companies therefore have little flexibility in their pricing because of too much capacity, and the bargaining power of workers is reduced due to high unemployment. In addition, with power increasingly weakened union, globalization has led to a cheap production of goods with high labor in China and other emerging markets, undermining the wages and employment prospects of workers unskilled workers in advanced economies. With low wage inflation, it is unlikely that there has been a steep rise in property. However, inflation fell even more today because of the overall downward adjustment of commodity prices in response to weak global growth. And gold follows the actual and expected decline in inflation. Third, unlike other assets, gold yields no income. While publicly traded stocks pay dividends, bonds have their coupons, and houses, rents, or are just a game of capital appreciation. Now that the global economy recovers, other assets - listed real estate or even the resurgent shares - now give better yields. Indeed, U.S. and global equities listed are far better than gold since the sharp increase of its course in early 2009. Fourth, the price of gold rose sharply when the real interest rate (adjusted for inflation) became negative after the various rounds of quantitative easing. The time to buy gold is when actual returns on cash and bonds are negative and declining. But the best prospects in the U.S. and global economies imply a term exit quantitative easing and zero interest rates from the Federal Reserve and other central banks, which means that real interest rates will rise rather than drops. Fifth, some have argued that the heavily indebted sovereigns would encourage investors to turn to gold because of the risks borne by the bonds. But there is an opposite situation. A large number of heavily indebted governments have substantial gold reserves which they may decide to get rid of to reduce their debts. In fact, the information that Cyprus planned to sell a small fraction - about 400 million Euros ($ 520 million) - its gold reserves led to a fall in the price of gold by 13% in April. Countries like Italy; which have massive gold reserves (over $ 130 billion), might also be tempted to do so, which would lead to a further decline in the price.

Sixth, some ultra-conservatives, especially in the United States, have so encouraged the gold rush that the effect was counterproductive. For this right-wing fringe, gold is the best hedge against the risk posed by the government conspiracy to expropriate private wealth. These fanatics also believe that a return to the system of the gold standard is inevitable, since the hyperinflation drift "devaluation" of paper money by the central banks. But in the absence of any conspiracy, and given the decline in inflation and the inability to use gold as a currency, such arguments are not valid. A currency serves three functions: it is a means of payment, unit of account and a store of value. Gold can be a store of value, but it is not a payment, you cannot use it to pay his races. It is not a unit of account the prices of goods and services, and those financial assets are denominated in gold. Gold remains so this "barbarous relic" by John Maynard Keynes, with no intrinsic value and mainly used as a safe haven against fear and panic largely irrational. Yes, all investors should have a very small share of gold in their portfolios as a hedge against extreme risks. But other real assets can be comparable coverage and extreme risk - although still present - are definitely lower than they were at the height of the global financial crisis. Even though the price of gold is likely to rise in the coming years, it will remain very volatile and will decline over time, over the improvement of the global economy. The gold rush is over.