My Point-by-Point Rebuttal of Roubini’s 7-point Analysis on the Bursting of the Gold Bubble

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 he have a clue about money or what causes economic growth…In fact, having just read Nouriel Roubini’s seven point analysis on the Bursting of the Gold Bubble, I am of the opinion that he doesn’t get even one of the seven points correct. In this article I offer a point-by-point rebuttal.

So writes Mike “Mish” Shedlock (http://globaleconomicanalysis.blogspot.ca) in further edited excerpts from his original article* entitled Nouriel Roubini Seriously Misguided on Gold, on Equities, on Economic Growth, on Money.

[The following article is presented by  Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]

Shedlock’s article* is quoted below in its entirety:

“Below is my point-by-point rebuttal.

1: Tail risks are lower

Roubini: 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.

2: Inflation is low and falling

Roubini: 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.

3: Other assets provide better returns 

Roubini: 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?

4: Exit from ZIRP will be  bearish for gold

Roubini: 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.

5: Highly indebted  countries are planning to sell their gold

Roubini: 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?

6: U.S. dollar appreciation is bearish for  gold

Roubini: 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.

7:  Gold has been hyped for irrational political reasons

Roubini: 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.

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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.

Conclusion: Roubini is Wrong About:

1. Gold
2. Tail Risk
3. Benefits of monetary printing
4. Benefits of fiscal stimulus
5. On what causes economic growth
6. Inflation
7. Stock market risk

That is one heck of a lot of things to be wrong about!”

[Also watch to this video with investment banker and Currency Wars (another video) author Jim Rickards talking with Kitco’s Daniela Cambone about Nouriel Roubini’s gold market eulogy After the Gold Rush.] [Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]

*http://globaleconomicanalysis.blogspot.ca/2013/06/nouriel-roubini-seriously-misguided-on.html (Copyright  2009 Mike Shedlock. All Rights Reserved.)

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