Gold bargain hunters beware

Gold prices have declined by over 30 per cent to under $1,300 per ounce since its peak in 2011 when it was at the US$1,900 per ounce level. Year to date, gold has depreciated by more than 20 per cent.

While the downtrend is a concern to investors, however, it is the recent decline of the yellow metal that puts most investors into fear.

"The run-up in gold prices in recent years – from US$800 per ounce in early 2009 to above US$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," said American economist Nouriel Roubini in one of his commentaries about two weeks ago. Roubini, also known as Dr Doom, had accurately predicted the US subprime mortgage meltdown and the 2008 economic crisis.

Over past 2.5 weeks, prices of gold have declined by more than 8 per cent. The decline is mainly due to investors reacting to US Federal Reserve's plan to slow down on its quantitative easing (QE) programme -- resulting in the strengthening of the US dollar.

A stronger US dollar makes it more expensive for buyers to purchase dollar-priced gold using rival currencies. This will hurt demand, and hence affects the price of the metal.

Roubini - who gave six reasons on why the gold rush is over in his article earlier this month - predicted that gold will fall to US$1,000 by 2015.

He said that gold performs best when "there is a risk of high inflation", as its popularity as a store of value increase.

However, despite the aggressive monetary policy by many central banks, including the quantitative easing programme by the US Federal Reserve, global inflation is actually still low.

"The reason is simple: while base money is soaring, the velocity of money has collapsed, with banks hoarding the liquidity in the form of excess reserves. Ongoing private and public debt deleveraging has kept global demand growth below that of supply," he said.

He said that this would result in firms have little pricing power, due to excess capacity. Workers will also have low bargaining power, due to high unemployment.

"Moreover, trade unions continue to weaken, while globalization has led to cheap production of labor-intensive goods in China and other emerging markets, depressing the wages and job prospects of unskilled workers in advanced economies.

"With little wage inflation, high goods inflation is unlikely. If anything, inflation is now falling further globally as commodity prices adjust downward in response to weak global growth. And gold is following the fall in actual and expected inflation," said Roubini.

However, Roubini is not the only pessimist.