I just finished reading Nouriel Roubini’s seven point analysis on the Bursting of the Gold Bubble in which Roubini’s asks and answer the question “Gold skyrocketed to over $1,900 per ounce in the fall of 2011 from $800 in early 2009, but has since collapsed by around 27%. Why?”
I offer a point-by-point rebuttal.
Roubini: First, tail risks are lower. Gold tends to spike when the global economy faces severe economic, financial and geopolitical threats; but, thanks to a variety of policy actions, the tail-risks argument for holding gold is less compelling today than at any time since the start of the financial crisis in 2007.
Mish: Japan is flirting with a Yen crisis thanks to Abenomics. Nothing has been fixed in regards to structural problems in the eurozone. A US recession is at hand. A China slowdown is baked in the cake. Trade wars loom between China and Europe. A full scale housing bust is underway in Australia. The UK threatens to leave the EU. The eurozone is unlikely to survive in its current state. Tail risks are enormous (and growing). I would have thought tail risks were so obvious that any serious economist would notice them. I was mistaken.
Roubini: Second, inflation is low and falling. Gold does best when there is a risk of high inflation, as it is a traditional store of value against inflation. But, despite the very aggressive monetary and quantitative easing from many central banks, global inflation is actually low and still falling as growth in most of the global economy remains below trend.
Mish: Gold actually does well in periods of deflation, in periods of credit risk, in periods of stagflation, and in periods of hyperinflation (the latter is obvious). Price inflation fell from 2000 to 2013 and gold rose from $250 to $1900. When was there risk of high inflation in that time-frame?
To be fair, one also needs to look at the disinflationary period between 1980 and 2000 when the price of gold collapsed from $850 to $250. Yet, in disinflationary periods in the last decade, gold soared. The difference? Credit risk and global distrust of fiat currencies. It’s easy to cherry pick a timeframe and say gold does this or that, when other timeframes and other factors disprove the thesis.
Roubini: Third, other assets provide better returns. Now that the global economy is recovering, other assets, such as equities or even real estate, are performing much better than gold.
Mish: Lovely! The same sort of argument regarding housing could have been presented in 2002, in 2003, in 2004, and in 2005. Yes, other assets are performing better, for now. But for how long? Is the current trend supposed to last forever? Has Roubini suddenly become a momentum trader in what is performing best?
Roubini: Fourth, exit from ZIRP will be bearish for gold. Real interest rates and gold prices are highly inversely correlated. Although real rates are still negative, the more positive outlook for the U.S. and global economy implies that the Fed and other central banks will gradually exit from QE and ZIRP. Real rates will rise over time rather than fall.
Mish: Precisely when is the Fed supposed to end ZIRP? Tomorrow? Next Month? Next year? A decade? If “real rates rise” won’t that be a sign of increasing inflation? Is increasing inflation good for gold or not? Roubini attempts to make a case that rising inflation and falling inflation are both bad for gold and both are about to happen simultaneously. Let me also point out that Roubini thinks ‘QE’ won’t end for another two years! He can’t have it both ways.
Roubini: Fifth, highly indebted countries are planning to sell their gold. Some argued that a world full of highly indebted sovereigns would push investors into gold as government bonds would become more risky. Instead, these countries are likely to dump their gold reserves to reduce their debts, or at least are considering doing so.
Mish: Roubini’s thesis has gone from circular silliness to the point of complete absurdity. Other than Cyprus (and Cyprus was forced at gunpoint) what central banks are dumping gold? And what central banks are buying gold? ZeroHedge reports Russia, Greece, Turkey, Other Central Banks Buy Gold
Russia, Greece, Turkey, Kazakhstan and Azerbaijan expanded their gold reserves for a seventh straight month in April, buying bullion to diversify foreign exchange reserves due to concerns about the dollar and the euro.
Russia’s steady increase in its gold reserves saw its holdings, the seventh-largest by country, climb another 8.4 metric tons to 990 tons, taking gains this year to 3.4% after expanding by 8.5% in 2012, International Monetary Fund data show.
Kazakhstan’s reserves grew 2.6 tons to 125.5 tons, taking the increase to 8.9% this year after a 41% expansion in 2012, data on the website showed.
Turkey’s holdings rose 18.2 tons to 427.1 tons in April, increasing for a 10th month as it accepted gold in its reserve requirements from commercial banks.
Belarus’s holdings expanded for a seventh month as did Azerbaijan’s.
Interestingly, Greece’s gold holdings climbed for a fourth month, according to the IMF data. Cyrus has about 14 tons of gold. If Cyprus sold all of it, the addition by Turkey alone would cover all of it.
Roubini: Sixth, U.S. dollar appreciation is bearish for gold. There is usually an inverse relationship between the value of the U.S. dollar and the dollar price of commodities, including precious metals like gold. Looking ahead, the relative strength of the U.S. economy and of U.S. asset prices compared with those of other DMs suggests that the dollar may appreciate—as it has done recently—against a basket of DM currencies.
Mish: The biggest gold rally of all time (1979) occurred while the dollar was going sideways with a slight upward bias. The dollar and gold both rose in 2005 as well. If the dollar were all-important for gold, it would never rise in terms of foreign currencies, but it definitely does do that.
Roubini: Seventh, gold has been hyped for irrational political reasons. Some extreme politically conservative gold bugs think that all government is evil, that there is a government conspiracy to expropriate most private wealth and that gold is the only hedge against this risk. This group also believes that we will return to the gold standard as central banks “debase” paper money and as hyperinflation ensues. However, inflation is falling globally and gold is not in any way a currency.
Mish: Yes gold has been hyped by many hyperinflationists. The same was true two years ago, five years ago, and 10 or more years ago.
That makes Roubini’s own hype all the more laughable. Roubini ends his hype with this statement: “The price of gold may temporarily go higher in the next few years, but it will be very volatile and trend lower over time as the global economy slowly mends itself. RGE expects gold to go to $1,300 by end-2013 and $1,000 by 2015. For the most part, it is time to offload and underweight Keynes’s barbarous relic.“
People ask me all the time where the price of gold is headed. I do not pretend to know, especially in the short-term.
However, I understand the fundamentals and Roubini clearly doesn’t.
Nor does Roubini have a clue about money or what causes economic growth. His statement “It is time to offload and underweight Keynes’s barbarous relic” is quite telling.
Can Printing Money Create Wealth?
Clearly Roubini believes that printing money creates wealth. The average 7th-grader (not yet influenced by Keynesian and Monetarist clown teachers) can easily figure out the fallacies of such ridiculous economic theories.
Who benefits from printing? The answer is those with first access to money (the banks, the already wealthy, and the government). Printing money does nothing but exacerbate the trend of income inequality. This is so obvious that Roubini cannot see it.
Buying gold is a perfectly rational reaction to the crazy central bank and governmental policies that Roubini advocates.
Precious Metal Fundamentals
Those interested in a primer on precious metal fundamentals can find it in Precious Metals – An Update by Pater Tenebrarum on the Acting Man Blog.
Those who think Fed asset levitation can and will last forever need to consider John Hussman’s June 3, 2013 article Following the Fed to 50% Flops.
Finally, those who wish to see a brilliant takedown of Roubini’s recent bullishness might enjoy “Dr. Doom” Becomes “Dr. Boom” – 1,000 SPX Points Too Late, also on the Acting Man Blog.
Things Roubini is Wrong About
- Tail Risk
- Benefits of monetary printing
- Benefits of fiscal stimulus
- On what causes economic growth
- Stock market risk
That is one heck of a lot of things to be wrong about!
Mike “Mish” Shedlock