Roubini Blasts "The Barbarous Relic," Recommends Spam Over Gold

Tyler Durden's picture

In a headline piece on, Nouriel Roubini writes an extended article slamming both gold bugs, and the so-called gold bubble, which he believes is far too volatile, and which, contrary to ever increasing claims to the opposite, will likely not get to the mythical price of $2000/ounce, and instead will head lower. The argument presented, as is widely the case, boils down to the trifecta of i)gold having no industrial utility, ii) no intrinsic value (no associated cash flow streams) and iii) costing an arm and a leg to store. While Roubini's thesis is attractive on the surface (if somewhat Keynesian and thus often reiterated by mainstream Economists), we present some counter arguments to Roubini's thesis.  

Roubini summarizes the current situation:

In the last nine months, concerns about a global depression have
dissipated and the global economy is recovering from its worst
recession in decade; deflation is still gripping the global economy as
the slack in goods and labor markets persists at high levels. So why
have gold prices started to rise sharply again in the last few months,
in spite of no near-term risk of inflation or of depression? And could
gold prices rapidly rise towards $2000?

On the one hand, the Doctor does see the pro-gold argument, which he highlights in five main points:

There are several reasons why gold prices are gradually rising, but
they do not suggest a rapid rise toward $2000; at most they suggest a
gradual rise with significant risks of downward correction.

  • First, while we are still experiencing global deflation,
    there are rising concerns that inflation may reemerge forcefully in the
    medium term because of large monetized fiscal deficits.
  • Second,
    a massive wall of liquidity—borne of easy monetary policy—is chasing
    assets. Some of those assets include commodities like oil and base
    metals—the rise of which could eventually become inflationary.
  • Third,
    dollar funded carry trades and a more generalized portfolio allocation
    to non-dollar assets (especially EM assets) are pushing the U.S. dollar
    sharply down. There is an inverse relation between the value of the
    dollar and the dollar price of commodities: the lower the dollar the
    higher the dollar price of oil and other commodities, including gold.
    The rise of gold in euros has been much more muted.
  • Fourth,
    the global supply of gold—both existing and newly produced—is limited,
    and demand is rising faster than supply over the medium term. The
    recovery of the global economy has started a revival of retail gold
    demand especially in India. Central banks looking to diversify their
    portfolios account for further demand—see for instance, the recent
    increase in gold holdings by emerging market central banks. Most of the
    increase in demand comes from private investors using gold as a hedge
    against low probability tail risks of high inflation and another near
    depression caused by a double dip recession. Inflation risk and the
    risk of a double-dip are both low, suggesting lower gold prices, but
    increasingly investors want to hedge against such risks early on. And
    given the inelastic supply of gold, it only takes a small shift in the
    portfolios of central banks and private investors to boost increase the
    price of gold significantly.
  • Finally, as sovereign risk
    is rising—see Dubai, Greece and other emerging markets and advanced
    economies—the concern about sovereigns not being able to back stop
    too-big-to-save financial system could rise again.

On the other, Roubini, sticking to the Socratic method, lays out the counter argument for a quick drop in gold prices:

  • First, the dollar carry trade may at some point unravel, popping the global asset bubble that this carry trade has fueled.
  • Second,
    central banks will eventually need to exit quantitative easing and
    effectively zero policy rates, which will put downward pressure on
    risky assets including commodities.
  • Third, bouts of
    global risk aversion may occur as the global recovery may turn fragile,
    anemic and subpar, thus leading to a rise in the U.S. dollar that would
    drive down prices of commodities and gold in dollar terms.
  • Fourth,
    since the carry trade and the wall of liquidity are causing a global
    asset bubble, some of the recent rise of gold is also bubble driven by
    herding behavior and momentum trading, pushing gold higher and higher.
    But all bubbles eventually crash and the bigger the bubble the bigger
    the eventual crash.
  • Fifth, the effect of rising
    sovereign risk on gold prices is ambiguous, as the events of recent
    weeks suggest. A risk in such risk could push up the price of gold if
    it leads to expectations that central banks will eventually monetize
    those fiscal problems. But in practice it has weighed on the price of
    gold because it has increased investors’ risk aversion and led to a
    rush into a different (and more liquid) asset than gold—e.g. the U.S.
    dollar—thus pushing gold prices down. In general, gold always competes
    with fiat currencies and anything that is dollar bullish—like repeated
    bouts of global risk aversion—tends to be gold bearish.

At the heart of Roubini's argument is a principle that is self-evident when one looks at the price dynamics of various asset classes today: that inflation is still in check. Of course the threshold between reserve accumulation by FR banks (which is now at ~$1.2 trillion) and all that excess money spilling over is all the stands between an environment of muted "disinflation" and runaway, spiraling and uncontrollable hyperinflation. And should the Fed lose control over a runaway monetary train, Gold at $2000 will be a distant memory. But more on that in a second. First, Roubini on why gold bugs' expectations will soon be dashed:

Thus, the gold bugs are wrong—or at least very, very premature—in
justifying buying gold as an attack on fiat currency. The velocity of
money is still low or falling—the opposite of a currency crisis or run
on the dollar. As a further indication of the collapse of credit/money
multipliers, indicators of expected inflation are subdued or falling,
despite governments printing money (excess reserves). The high
inflation scenario may be constrained even if/when easy money gains too
much traction, as the yield curve would steepen sharply, raising the
discount rate for risky private sector debt and for corporate equity,
limiting the speed of the recovery and hence the ability of states to
impose inflation surprises in the context of shortening average debt

Finally, let’s assume the global economy double dips and concerns about
near depression and sharp deflation reemerge. Should investors hold
gold in that world? In a true world of near depression, gold bars are
pretty much useless. Keynes referred to gold as a “barbarous relic.”
Unlike other commodities, it has little intrinsic value. Much like a
fiat currency, gold’s value is based largely on the irrational beliefs
of investors. In a depression or near depression, one would be better
off stockpiling canned food and other commodities like oil that are
useful for riding out Armageddon. You cannot eat gold or burn gold.

Roubini concludes:

Investors should thus be wary of getting the gold bug and being stuck
with this barbarous relic. The recent swings in gold price—up 10
percent one month, down 10 percent the next—prove  the point that gold
has little intrinsic value and that most of its price movements are
based on beliefs and bubbles. As an insurance policy against the tail
risk of eventual inflation, it may be useful to hold a small amount of
gold in one’s portfolio, but stocking up portfolios with a fiat
currency that has marginal practical use, a zero nominal interest rate,
high storage costs, and the price of which is subject to volatile whims
and bubbles is totally irrational. If you want to hedge against
inflation, stock up on Spam or other canned food
or buy futures on
commodities that have more physical uses and consumer demand.

We disagree with the professor across a few key points. As Dr. Roubini himself will acknowledge, the primary reason for the rapid "improvement" in asset valuations, and the postponement of the double dip/next leg of the depression, is solely due to global central banks having themselves onboarded private sector asset exposure as the very last option to prevent an all out collapse of the financial system: individual sovereigns' taxpayers are now the owners of what used to be Merrill's toxic CRE loan bonanza. Whereas a year ago the collapse of Goldman would have been possible without it also involving an at least technical default by the US, we are now beyond such capitalist flights of fancy, courtesy of the Bernanke Put (let alone the discussion of what the MTM mismatch of the central bank balance sheet is - courtesy of increasingly more lax accounting standards, the spread between fair value and book value, as we have reported, keeps increasing and could potentially be a 20%+ delta). These assets need to produce cash flow, which they do not, or at least not to a point where the Fed's balance sheet is self-sustainable. Which explains the massive money printing, via QE, although as pointed out the actual cash does not hit circulating money, but merely ends up at the banks, earning 0.25% (why not: on $1.2 trillion it amounts to $3 billion a year in absolutely risk-free taxpayer subsidies). The main reason, as Zero Hedge will shortly show, why the dollar keeps getting pillaged versus its main counterpart, the euro, is that while the Eurozone balance sheet has stayed flat, courtesy of a mortgage bubble that never hit the ludicrous size of its US counterpart, the US Federal Reserve "assets" keep rising, and at a rate which is the inverse of incremental dollar devaluation.

In essence the only reason why gold has appreciated less in terms of Euros is thanks to US generosity to assimilate European toxic asset losses, via an osmotic, and nearly 1-to-1 increase in equity markets between America and Europe. In this way, even as the euro continues not devaluing, the implicit Eurozone inflation is still nonetheless occurring, courtesy of increasing equity values, which happen purely on a sympathetic reflex to what the S&P is doing in New York. Another interesting observation are the comparable rates of expansion
of the balance sheets of China and US - once again China is taking
advantage of not only the dollar peg, but of it having even less a
vocal political system to keep the printer in check (i.e., the absence of its own version of Ron Paul allows it print
its way to "9% GDP prosperity" every year). At the end of the day, the Fed can only carry the burden of importing global inflation so long before the need to tighten is the opportunity cost of the Fed Chairman's job (and the ruling party's continued majority in the House and the Senate). And this is precisely the day that gold bugs live for.

Mr. Roubini is wrong on one key argument: gold bug mania is not so much driven by the dream of fiat currency destruction (we all know the race to the bottom is on everywhere except in Europe which as discussed above has it own unique set of circumstances), but by the volatility in the actual reversal from expansion to contraction monetary phases. The Fed is in uncharted monetary policy territory, and way out of its comfort zone. If history is any indication, Greenspan, who was unable to control the runaway train of monetary glutting in the early 2000s, is a perfect case study of what will happen - why would Bernanke, who is Alan "Moral Hazard" Greenspan reincarnated, get it right? Especially, having demonstrated over the past month a complete lack of comprehension of asset bubble existence. And that particular bet explains why all the smartest money is currently accumulating it. Many pundits have said that the one who times the switch to inflationary policy by the Fed will be the richest man in 2010 (or 2012 if Goldman is right). Yet gold is a negative carry-free way to make just such a wager with the broadest possible time horizon: gold's lack of positive carry offsets precisely the theta bleed which one would incur if one was merely rolling S&P puts constantly waiting for the Nassim Taleb moment of six sigma plus singularity. Also, once purchased, there is no need to roll the gold contracts, especially in physical form. At the end of the day, if the monetary skeptics are right, and they most likely are, the Fed will not only be unable to rein in inflation but we will go straight to hyperinflation and not pass go. At that moment the price of gold will hit escape velocity. And as in hyperinflation traditional supply/demand mechanics collapse, especially for such industrial metals as copper, aluminum, and, yes, even silver, gold's lack of intrinsic value will be the main thing in its favor. Furthermore, with gold prices representing a nearly 80% discount on the global monetary base in simple value terms, in a scramble to a makeshift gold standard, the next resistance level will be not $2000, but $6000/oz.

Yet in all honesty, we do agree with Roubini, that at that point in the future, when all non-gold commodities are flatlining, spam will likely be just as valuable as gold. Unfortunately, lead will be in a league of its own. If that is the price to pay for the terminal proof of flawed-from-the-start Keynesian economics, and the failure of the Federal Reserve as the bastion of Wall Street's "second estate" interests, and the subsequent demise of both, it may just end up being worth it.

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Sqworl's picture

Buy Gold...Nou Nou will be buying lots of gold trinkets this Holiday for his "Ladies"....;)  He alone will spike the price!

DoChenRollingBearing's picture

I agree, Nouriel looks to be wrong on this one.  Maybe he has never held a kilo bar of gold...?  LOL re trinkets for his ladies.

Anonymous's picture

"You can no eat or burn gold." Really genius? A good way to know that a person doesn't know what is the purpose of gold is when they spout this nonsensical line.
Gold doesn't compete with food or oil, it competes with fiat money. You can't eat paper dollars either, and if it comes down to burning the paper dollars then you'll be wanting to own gold anyway.

Anonymous's picture

Actually, I've digested paper.

CombustibleAssets's picture

You can't eat or burn iphones either but that does stop people from trading them on ebay.

It's all about relative value.

Anonymous's picture

I love when people say gold has no industrial value. Gold is the best conductor of the metals. Really high end cables have gold plating on the tips. The reason for golds lack of use in industry is the value placed on it as a monetary metal is much higher than the industrial value

Anonymous's picture

Gold is NOT the best conductor. Silver is far better. Gold is chosen for its corrosion resistance.

bugs_'s picture

End of Keynesianism.  Priceless.

truont's picture

Roubini: "C'mon, guys! Keynesianism works! Really! Pay no attention to India's CB buying gold bullion!  Those Indians will for sure dump their gold soon, once they realize the terrible mistake they've made!  Keynesianism works!  In the long run, we'll all be dead anyway!"

Gordon_Gekko's picture

How much money is Roubini managing again? Right. When some of the best traders in the world ala John Paulson, Tudor Jones et. al. are buying Gold and putting their money where their mouth is, why should I listen to a total LOSER like Roubini?

BTW, somehow those bashing Gold almost always happen to be total losers managing/making ZERO amount of money and are big on lecturing/producing hot air (Bob Prechter anyone?). Hmmm...I wonder why...

Anonymous's picture

Paulson also buys a ton of BAC, so we also buy BAC? Poor argument pal.

Gordon_Gekko's picture

If someone bought it at the right time, not a bad deal at all.

Anonymous's picture

Another irresponsible professor.

Oracle of Kypseli's picture

Yes. but your offsprings will be living in a different world

cocoablini's picture

Why do these economists insist that something popular isn't popular? It's like telling teenagers not to have sex...

Also in a credit contraction with declining money supply GOLD is just as liquid as the dollar. You can swap it, it's fungible and universally accepted. Industrially, it's used in computers. 


What a rant...

Anonymous's picture

"Also in a credit contraction with declining money supply GOLD is just as liquid as the dollar. You can swap it, it's fungible and universally accepted. Industrially, it's used in computers."

Please cite your source.

Careless Whisper's picture

@ cocoa  Roudini is lookin for headlines. He's become irrelevant. Max Keiser intervieved William Black. Very insightful.


Kitler's picture

At an often substantial premium to market at that

MarketTruth's picture


  Gold is EXTREMELY easy to exchange in localized currencies in many places around the world. Sadly, Americans do not realize this yet Europeans and Asians are well aware of this fact. Gold in indeed used in industry as connector coatings and other mission critical wiring and covering/plating. Gold is also an excellent heat reflector and used by NASA, top professional race teams, etc..

msjimmied's picture

For what it's worth, when India had restrictions on foreign currency exchanges, you were allowed some piddling sum like maybe $200 converted before you left the country. People used the other network of international money lenders, or they wore 24k gold jewelery. When you reach your destination, you check into an indian jeweler who would charge you $10 dollars over spot price for any transaction. Buy or sell. You can find them in most major cities. They generally won't mess with you. They know you know what you have. They don't play the Cash for Gold stuff. They don't buy 14k.

WaterWings's picture

No it's not:

This guy's approach sucks, but it's hard to refute that these rich ***** have little idea of what is going on:

- and further proof that this falls on deaf ears:

To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;



"Hey, I'm practically giving away Maple Leafs, too bad you ***** don't know how to evaluate a counterfeit!"

Gold is not liquid because our government does not follow it's own constitution anymore - and the citizens are hyper-specialized, hyper-clueless, overweight, and indebted. A gold-backed paper currency, not fiat!, is the only solution (as a compliment to a standard (weight and purity) coin) - because the paper itself is liquid, portable, and immediately redeemable for the real thing.


But, wait, to be fair, I have to agree that if you are willing to take a loss you can trade gold very easily. Just go to Detroit - a fi dolla ho will love you long time.

WaterWings's picture

Okay, wait. In foreign locales I cannot provide experience. So, I may be off my base.

cocoablini's picture

Source? Just look around you. CB's are swapping gold-there's a gold ETF-there's a mutual fund in Switzerland that converts to physical gold. EBAY,coin shops, Craig's list...

Anonymous's picture

I'm no paper apologist, but to claim that Au is as liquid as the dollar is a bit misguided. I dare you to go to the gas station and try to pay for a gallon of gas with a krugerrand, or to the grocery story and buy a loaf of bread with a gold American Eagle. Ain't happening. Gold will only be as liquid as the dollar as soon as its legal oppressor - legal tender laws - are compromised. Absent the abdication of legal constructs, the dollar is exponentially more liquid than gold.

Yes, absent legal tender laws gold is certainly as liquid as fiat trash. But given that deflationary episodes tend not to cause civil unrest and legal dislocation to the extent runaway inflationary episodes do, the claim that gold is as liquid as the dollar doesn't really hold up.

Internet Tough Guy's picture

You forgot to say that you can't eat gold. Seriously, how hard is it to sell gold for money, then buy what you want with money?

Anonymous's picture

Or you could, you know, hold money to begin with and forego jumping through hoops B and C (particularly if you're paying >0.00001% above spot, which would leave you with less than what you began with). Perhaps you can put me in touch with these merchants who are accepting Krugerrands for their wares?

Look, I hold a significant amount of metals and am as bearish as the next ZHer about the dollar and ultimate solvency of this country. But to say that, TODAY, gold is as liquid as FRNs is simply incorrect. Do you really dispute that?

delacroix's picture


I will sell you a generator, or a quad, or a motorcycle, or land for GOLD

Anonymous's picture

Exchange it or what money? You goldbugs are seriously retarded.

Gordon_Gekko's picture

He also forgot to say that he can't wipe his ass with it, which, BTW, he can with the dollar. Hence the dollar is more"liquid".

Anonymous's picture

How did you two manage to turn my response into being anti-gold? I hold plenty of it (and other metals and commodities).

Few can see the writing on the wall - let alone read what said writing is actually saying. I consider myself lucky that I'm among those who can. This country's - nay, world's - finances are rotten, and it's clear that something's got to give. But the when and the where, not to mention the nature of the ensuing fallout, are all completely unknowable. As a hedge against such extreme uncertainty, only fools talk themselves out of holding things which will be liquid in the aftermath of TSHittingTF. The key in such a scenario isn't JUST gold; it's liquidity and flexibility.

But in the IMMEDIATE aftermath of such an event, and until every J6P comprehends the utter worthlessness of fiat junk, some of our less-knowledgeable peers will for a time still attempt to transact in FRNs. It is for those transactions, and those fools, that I'm reserving a small collection of FRNs. Like it or not, FRNs are for today and the immediate short-term the most liquid monetary instrument.

delacroix's picture

liquor is a pretty liquid asset maybe we should stockpile rum, and spam, and cigarettes, and condoms, along with our PM's.

Anonymous's picture

You think you're being funny, but actually you're right.

rubberduckie's picture

Uh, actually, the grocery store and the gas station are required by law to give you face value, $50, for your one ounce American Eagle coin.  It's US legal tender, "legal for all debts, public and private."

Oracle of Kypseli's picture

In a depression or hyperinflationary situation, those who want to unload land and real estate will only accept precious metals. The Kennedy's made huge basement RE deals for silver in the 30's.

There are also legal or underground places which exchange PM's for cash as you need.

Again 25% of your total assets in gold and silver will protect you from such case. If nothing happens, your dollar assets will make up the other way even if gold goes to $350.

Just a hedge. I just don't see that anyone should argue one way or another. This is a settled argument since the Babylon days.   

Carpenterman's picture

Keep in mind that Roubini has become the banker's pet contrarian.


I don't know what to think of this guy anymore. I think he is a tool.

Anonymous's picture

Please keep your stored labour in our highly dilutional-and-expected-to-blow-up fiat currency so that we can offload all the deals gone bad on your ignoramus holders and enrich our mistake-prone and greedy friends.

Gold is not the ultimate money. It's supply is not dictated by the scarcity of natural limits and hence undoes and prevents our monetary mischief.

Yes please continue using our monopoly of printed pledges against your neighbor's future labour. Also disregard the fact that we have shown neither good government, budgetary fiscal discipline, nor spending restraint.

Please buy our bonds, machine traded round-trip transacted and over-the-top bubbly equities, or real estate whose present glut was over-incentivized by widespread, unregulated fraud and whose price must still fall at least 40%.

In other words, dump good money after bad chasing a return that is systemically no longer there; or, if you choose to hoard, hoard in OUR cash.

All the better to eat you with.

Roubini the Houdini. There is no economic law which I cannot escape from.

Anonymous's picture

"Tool" being the operative word. Read Ted Butlers' commentaries on naked shorting of gold and silver by Goldman and JPM. He obviously chooses to ignore a fact that is based on Commitment of Trders report and physical supply, and to the benefit of those that would be at a loss to cover on $2000 gold. With a fiat dollar perhaps their only concern are costs based on ink to gold ratio. The ratio is well in their favor considering the value of the entire US gold reserve (8000 tons)is around $300 bil, and just in backing the 1.8 bil rise in debt ceiling would be a 6 fold increase. If the dollar was based on gold relative to the national debt the price would be around $40,000 - so if inflation ticks up a point which is cheaper; paying the extra .1% interest on $12 Tril or shorting a few hundred bil in the gold futures market.
When the disparity between physical gold and the paper market finally unravels, Goldman is betting on 2012, it would be well advised to have a seat when the music stops.
Contrary to Roubinis claim, gold has value as a currency - maybe he should read the Constitution, it may be hanging by a thread, but it will still be around long after the New World Order is past tense. Its too bad that The Powers That Be are intent on covering the truth with lies and testing the resolve of the populace, because if one understands the simple truth in an issue, they are not likely to be dissueded regardless of degree, credential or religious facade.
- Good Article, Thanks.

Oracle of Kypseli's picture

Gold's value is constant.
It's just that the fiat currencies are in constant limbo of liquidity and/or trustworthiness.

In rough calculations, a 1923 Lincoln was sold for $520 or 18 Oz, of gold. Today, a similar car should cost you the same. But the similar car is priced at 35K or more, therefore gold should be at $1800-$2200 an oz.

You can make the same comparison with shoes, food or whatever other need.

Master Bates's picture

Just more hopium.

Look at the value of a car in 1932, versus what you get on your car today.

There is much more value in a car from 2009.  That doesn't mean that gold is worth more, but the car is.

Oracle of Kypseli's picture

Cars are indeed better today and the government uses your argument (called hedonics) to supress the inflation number.

Same with the steaks. If the price of the filet mignon goes up, the goverment substitutes with skirt steak to hide the uptick.

Most economists though disagree with that theory.


Hephasteus's picture

1 lb of coffee, 14 ounces of coffee, 13 ounces of coffee. Labled 13 ounces but only 12 ounces in it.

It's all about hiding inflation.

Anonymous's picture

that's right. he is. he is of turkish or iranian jewish extraction, teaching, and working and living in new york. what else needs to be said. he is working for the other side. besides if he doesn't play the right notes, and considering what a tiger woods kind of playa he obviously thinks he is, it would be no problem for his supply of shiksas to shall we say dry up real fast, if he doesn't do what is wanted by his puppeteers.....

MsCreant's picture

I don't defend Roubini's perspective, but your silly racism detracts from this conversation.

Shake yourself out of it. Race doesn't matter here.

desk-jockey's picture

ms. c, i like the cut of your jib, lady! (both for this and your many quality comments here on ZH).