Roubini's alternative safe haven assets

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Gold-bars Nouriel Roubini thinks that gold is overvalued:

The recent rise in gold prices is only partially justified by fundamentals. Nor is it clear why investors should stock up on gold if the global economy dips into recession again and concerns about a near depression and rampant deflation rise sharply. If you truly fear a global economic meltdown, you should stock up on guns, canned food, and other commodities that you can actually use in your log cabin.

Roubini has a fair point. For now, I struggle to find a method to the madness of gold prices. Inflation fears? Unlikely. A weak dollar? The price of gold hasn't been responsive to the recent dollar rally. So why the sharp rise in price?

One explanation comes to mind: buy gold now, because it will surely go up in value later.

Uh oh.

Back in 2006, I remember watching late-night infomercials selling books, videos and seminars on how to profit from the real estate boom. Today, it is difficult to turn on the TV without coming across an advertisement or two for selling "unwanted" gold. The latest craze in America are "gold parties", where friends and neighbors come together to collect their miscellaneous gold pieces and sell them to an outside buyer. Something about the whole thing seems unsustainable.

Nevertheless, from a development perspective, the gold market is an excellent place for investors to manifest their rational and irrational economic fears. Gold has relatively little use in the real world, and its fluctuation in value per se has little impact on much of the world's population. Contrast today with the first half of 2008, when inflation and currency fears resulted in a dramatic spike in the price functional commodities, such as food, oil, and copper.

In this sense, I hope investors ignore Roubini's advice. When overcome with fear and insecurity, they should invest their wealth in products that have little effect on the world's capacity to feed itself and grow.

(h/t Paul Kedrosky)

(Photo: Covilha)

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