Venice: The run-up in gold prices in recent
years—from $800 per ounce in early 2009 to above $1,900 in the fall of
2011—had all the features of a bubble. And now, like all asset-price
surges that are divorced from the fundamentals of supply and demand, the
gold bubble is deflating.
At the peak, gold bugs—a combination of paranoid
investors and others with a fear-based political agenda—were happily
predicting gold prices going to $2,000, $3,000, and even to $5,000 in a
matter of years. But prices have moved mostly downward since then. In
April, gold was selling for close to $1,300 per ounce—and the price is
still hovering below $1400, an almost 30% drop from the 2011 high.
There are many reasons why the bubble has burst, and why gold prices are likely to move much lower, toward $1,000 by 2015.
First, gold prices tend to spike when there are serious
economic, financial, and geopolitical risks in the global economy.
During the global financial crisis, even the safety of bank deposits and
government bonds was in doubt for some investors. If you worry about
financial Armageddon, it is indeed metaphorically the time to stock your
bunker with guns, ammunition, canned food, and gold bars.
But, even in that dire scenario, gold might be a poor
investment. Indeed, at the peak of the global financial crisis in 2008
and 2009, gold prices fell sharply a few times. In an extreme credit
crunch, leveraged purchases of gold cause forced sales, because any
price correction triggers margin calls. As a result, gold can be very
volatile—upward and downward—at the peak of a crisis.
