In interview given to Hard Assets Investor, Nouriel Roubini, professor of economics at New York University’s Stern School of Business and chairman of the RGE Monitor, said the rise in most commodities is too much, too fast and not justified when compared to economic fundamentals.
“Well, in my view, commodity prices have increased since the beginning of the year too much, too fast, when compared to the improvement in economic fundamentals. Some of that increase is justified. But if the global economy were to have a more anemic, subpar recovery—if instead of a V-shaped recovery, there’s going to be a U-shaped recovery—then I actually think demand for commodities would be weak compared to supply, and there could be a correction in commodity prices in 2010.
Take oil prices: They have gone up from $30/barrel to over $80, at a time when demand is back to 2005 levels, and oil inventory is at all-time highs. Part of the increase is justified by fundamentals. But part of it is essentially this wall of liquidity chasing assets, and the effect of carry trade on the U.S. dollar, driving further higher these commodity prices.
So these nonfundamental factors can push oil and commodity prices higher, especially if there’s going to be an increase in expected inflation. But the fundamentals of supply and demand actually suggest that, from now on, oil and other commodity prices should be lower, rather than higher.”
When asked about gold and whether the precious metals has a role to play in currency, either as a de facto or literal currency standard, Roubini said that “the central banks are diversifying their foreign reserves, and that’s increasing their demand for gold. China’s doing it; India’s doing it; others are doing it. Gold is going higher in part because of this central bank diversification, and in part because, of course, whenever the dollar weakens, we see an inverse relation within the dollar price of commodities, including gold.
But if you ask me, can gold can go towards $1,300, $1,400, $1,500 or $2,000, like many gold bugs say? Well, there’s only two scenarios in which that could happen.
First would be a real increase in global inflation, and we don’t see that right now. In most emerging markets and advanced economies there is actual deflation, because there’s glut of supply rather than demand, workers have no pricing power and they cut wages. So in a situation where there’s deflation rather than inflation, why would gold be staying high? It cannot be. It can go up above or below $1,000, but it’s going to move around those levels, and it’s not going to break toward $1,500.
The other scenario is Armageddon, another depression, where everybody would buy canned food, guns, ammunition and gold bars and run to a cabin in the mountains. That was the risk after Lehman, but that risk has been severely reduced.
So we don’t have Armageddon; we don’t have inflation, so gold can maybe go slightly higher. But those people who delude themselves that gold can go to $1,500 or $2,000 are just talking nonsense. The fundamentals are not justified, and those people are just talking their books.”