Roubini Doesn't Believe in Gold

Nouriel Roubini shares some thoughts about gold in this interview with IndexUniverse, drawing the same conclusion that millions of investors have drawn - gold can't go significantly higher without high inflation or Armageddon, neither of which are imminent.

I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies. So there’s no inflation, and there’s not going to be for the time being.

The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30 percent unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon.

To his personal list of reasons that gold can go up, Nouriel may want to add the one that David Einhorn noted last week - people are increasingly realizing that all paper money is bad.

After what we've seen over the last couple years, $1,200-$1,300 an ounce gold sometime in the next year without either high inflation or a financial catastrophe probably isn't going to shock too many people (aside from those like Roubini).

In fact, if the dollar continues to weaken, that could occur very quickly - just look at the move from $950 to $1,050 over the last couple months and then look at a multi-year chart.

You'll see that the gold price has spent a lot of time in the $800-$1,000 range and is due for another big move up.

Regarding the "lack of inflation" argument, the folks at GATA had a few comments:

If GATA had been part of the interview, we might have asked Roubini to elaborate with a few follow-up questions. For example:

1) What if the monetary inflation already has occurred over decades and has been masked, in regard to gold, by Western central bank gold sales, leasing, and underwriting of bullion bank derivatives, activities meant to mask that inflation and support government currencies and bonds and suppress interest rates?

2) Since it is generally acknowledged that in recent years gold demand has greatly exceeded supply and that the gap has been filled by massive dishoarding of gold by Western central banks, what if, inflation or deflation aside, the day comes when central bank reserves available for dishoarding are simply exhausted? What happens to gold then?

3) Is Roubini aware of the Federal Reserve's recent admission that it has gold swap agreements with foreign banks that the Fed insists on concealing? (For that admission, see http://www.gata.org/files/GATAFedResponse-09-17-2009.pdf.) What does Roubini imagine the purposes of those swap agreements might be? Could those swap agreements indicate the continuation of a long and often surreptitious U.S. government policy of suppressing the gold price, a policy documented extensively by GATA and others? (See http://www.gata.org/node/7894 and http://www.gata.org/node/6242.)

Roubini is a brilliant guy who has identified much that is wrong with the world financial system and who lately has fascinated the financial news media. Imagine the possibilities if someone in his position was to go beyond the financial news media's superficiality in regard to gold, or if the financial news media were to question his own superficiality -- or, for that matter, any other supposed expert's.

The more you think about it, the less meaning there really is in any "gold-inflation" relationship given how central bankers and economists have changed the meaning of the word "inflation" over the years.

We'll probably never have high "consumer price" inflation the way it's currently measured.

As for the GATA arguments about gold price suppression, a few years ago I was starting to worry that I'd never know in my lifetime whether there was anything substantive behind this.

That's much less of a worry these days...

For years, Jim Rogers has pooh-poohed gold as an under-performing commodity saying that central banks simply have too much of the stuff that they can sell for too long and that this will keep a lid on the price. The sales are ostensibly not because they're suppressing the price, mind you, but because they have no use for the stuff any more.

That seems to have changed rather dramatically in just the last year or so as central banks around the world have been doing more buying than selling.

The gold story is not going to go away anytime soon, though it's not clear whether any economist will ever really understand it.

Comments

[Roger Knights:]

Edward de Bono has written about something he calls "the intelligence trap," to which smart guys like Rogers and Roubini succumb. Smart guys see beyond the superficial justifications for some position, and once they've done that they stop, figuring that that's the end of the story. Sometimes they're right, maybe most of the time they're right, but sometimes--like now, with gold--there are more layers to the onion.

Oct 27 06:50 AM

[SW Richmond:]

'The gold story is not going to go away anytime soon, though it's not clear whether any economist will ever really understand it.'

As a longtime goldbug I have engaged in the same arguments with so many iterations of B schoolers spouting virtually the same nonsense about gold that I wonder when we will finally exhaust the supply. They all cling to their monetarist indoctrination, the one they had to regurgitate to pass the test to get their MBA, to wit:

Gold is a barbarous relic.
It produces no income stream.
It is a commodity.
You can't eat it.
It's only valuable because we like to adorn women with it.
Central Banking is the greatest thing since sliced bread.
Money printing is an OK idea, we're just replacing lost exchange tokens so there's no 'inflation'.

Economists and B schoolers will never understand it until it runs them over. More for me at a lower price. Hooray!

Oct 27 07:58 AM

[norespect:]

Perhaps the last good reason that gold doesn't move to its true price ( substantially higher) is that the boobs that love gold dismiss every drop as central bank intervention and every move up the way Adam explained to Eve the first night in the garden " stand back honey I don't t know how big this going to get"

Oct 27 09:10 AM

[Francis Sch...:]

How can you NOT believe in Gold!? Even if you don

Oct 27 11:45 AM

[AMR71:]

"Yeah, it can go above $1,000, but it can’t move up 20-30 percent unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes."

In other words, buy and hold gold. Thanks, Roubini. Will do.

Oct 27 01:48 PM

[Spartacuss:]

Again, one has to separate the investors from the speculators. I define an investor as one who latches on to a good thing and holds both for future value and for earnings. In this case, we know, gold earns nothing. But there is the magic because in order for something to earn something, risk is involved. There is no basic risk in gold, it is what it is, won't tarnish or rot and it doesn't take a whole lot of it to represent considerable value, so it stores well in hidden places.

So, then, what is the need for gold? Protection, period. Much like the gun in the closet, always at the ready when you need it. OK, in the case of gold, protection from what? Inflation, you bet. Confiscation? This time around if the government wants to confiscate gold, I seriously doubt anyone is going to willingly turn it over. And depression, well, as said, we can't have a depression, at least not in the normal sense. Of course, there is a cost for all this avoidance. For now, Roubini is most likely correct. However, the spending in Washington is not going to abate. IN FACT, THE PUBLIC AND PRIVATE DEBT HAS NOW REACHED THE LEVEL WHERE IT CAN NEVER, EVER, BE REPAID. Let that sink in as it assures a runaway inflation. How soon? No one can answer that, however if we look at the fresh 11 trillion of liquidity pumped just in the span of a year or so, I would tend to want to believe it will be a lot sooner rather than later as the reflation effort has just got underway big time and a lot more to come.

We are in serious trouble here beyond the issue of gold, we are now entering a new phase of government: statism. Statism will destroy capitalism and is already well underway in that regard. Soon, government will be forced to provide more provinder to more industries with an eventual Czar at the head of all board room meetings. It's going to get very interesting.

Oct 27 02:38 PM

[Mark Bern:]

There seems to be a contradiction in the article. At one point there is a reference to Central Banks selling gold to hold down the price and manipulate prices. At the end of the article the author says that Central Banks have been net purchasers of gold in the last year or so. How is the purchase of gold by Central Banks supposed to manipulate gold prices and keep the price lower than it would otherwise be? They are either holding it down or they are supporting the price. Or they are doing both alternatively, but that doesn't make sense when one considers that gold would most likely be doing just fine on its own lately.

Having said that, I agree with the author's premise that gold can go up from here because the disconnect between gold and inflation is real since the calculation of inflation is more political than real. Real inflation, that which those of us who work for a living have to contend with, is much higher than what has been reported for many years. That falsehood continues to erode our buying power while the value of gold continues to rise, reported inflation or not.

Oct 27 02:42 PM

[DONE_SONZ:]

--The only other case in which gold can go higher with deflation is if you have Armageddon--That will be achieved with debt default.

Oct 28 06:32 AM