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

In a headline piece on roubini.com, 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
maturities.

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.

Comments

[Anton LaVey]

Gold deflates like everything else: agreed. BUT... (a) it will never get to zero, (b) it will stay convertible in liquidity rather easily, even in a very severe recession (which is the case right now) and (c) it will probably lose value slower than any other asset class, with the possible exception of silver.

I really don't like spam, but another asset you might want to consider are cigarettes. When the sh*t hits the fan, there will be a lot of addicted people out there, ready to work , barter, trade and buy their favourite drug.

Let's face it: all this talk about stocking food, ammo and gas in a private invisible bunker is just silly talk. Depression, inflation, or even hyper-inflation: all of these are now distinct possibilities, if not outright certainty.

[WaterWings]

Let's face it: all this talk about stocking food, ammo and gas in a private invisible bunker is just silly talk. Depression, inflation, or even hyper-inflation: all of these are now distinct possibilities, if not outright certainty.

Wait, which one? You're saying the one thing in the first sentence, and then 'you are making big joke?' in the next? I wish they made invisible bunkers, and public shelters are available now (I don't recommend them), but food, ammo, and gas would all have been great, in quantity, in 1920's Germany!

Please explain because I'm confoozed. You're so silly!

[Anton LaVey]

I am trying to point out the obvious: if you are into stockpiling stuff, include cigarettes, even if you are not a smoker. Cigarettes are cheap, easily stored even in large quantities, and people addicted to their smokes will trade you a lot of (precious) stuff for their daily dose of tobacco. So cigarettes it is. Take a look at cluborlov.blospot.com for an example of this (you may have to search within the archives).

On the other hand, total collapse of civilization, as envisioned by many here on ZH is getting tedious and, frankly, more than a little silly. Society will continue to function - more or less - even in a deflation, depression, or high inflation. We are in for a lot of pain, but I don't think I'll have to lock my family in a super-security bunker anytime soon.

At least, I hope I am right. But I may be wrong. Like many statement, on ZH and elsewhere, you have to make up your mind, and think for yourself.

[MsCreant]

I'm sort of with waterwings here. If you think these things are possible or likely, why is stock piling a bad idea? Do you think things will be so out of control that there is no use in trying?

I am one of your silly people. I do it because there could be an earthquake. I do it because there could be other natural disasters. I do it because I saw NO, like you did, on television. I do it because I realized that I am dependent on a very fragile distribution system that could go down at any time for a number of reasons. I even do it in case I lose my job, I will not feel like a drain on my husband (for a while) because I have saved and stock piled.

To be gentle with you, I do not see this as silly. If you are my neighbor, I hope you prepare too. Then you and I can stand side by side in the community and help others, and thus help ourselves. I am selfish like that.

Peace, if you ever see this.

[Rusty_Shackleford]

Bingo.

Everybody drives around with a spare tire in their trunk in case they get a flat tire. 

Is everyone paranoid and obsessed with flat tires?

Of course not.  It is insurance against a real, although infrequent and relatively unlikely, occurrence.  Once you have the spare, you no longer have to constantly worry about getting a flat.  If it happens, you're covered.

When one stops and thinks about the fragility of the supply lines of the things they absolutely require to survive, and the simple fact that they exert absolutely no control over them, I have no idea how most people can sleep at night.

About 15 years ago, the local tax-feeders shut off the electricity and water to my neighborhood to do some kind of repair/project.  Things invariably didn't go as planned and things were down for about 40 hours.

It was almost like Lord of the Flies. 

I shit you not. 

It woke me the hell up.

This thin veneer of civilization peels away rather quickly.

[Anton LaVey]

Dear MsCreant: I agree with most of what you posted, but here are a few points for you to ponder...

• We don't live in the same country. I suspect you live in the USA, with large distances and a slightly higher degree of violence. I live in a much smaller country, with less violence (for now) and a somewhat stronger social fabric. I expect the country I live in to do better than the U.S.
• I "stockpile" food - I probably have about a week or two of foodstuff in the pantry and freezer. But if the sh*t really hits the fan, I'll probably take my whole family out to the countryside, where I have relatives and I know I'll have much better access to foodstuff (thank heavens and fate for my Grandpa and his veggie garden).
• What you (and many others) are planning for is a complete collapse of society. I am sorry, but, to me, this simply sounds silly. There will be pain, some things will break down, but I don't expect riots in the streets and murder around every other street corner.

Again, different circumstances mean different outlooks. What you are doing may be appropriate for your circumstances. I hope mine never become as dire.

I hope this explains my position. As I have said, we are in different countries and different situations. What may sound like good, smart planning simply sounds rather silly to me. But I may be wrong.

[JR]

Don’t be such a stranger, London Banker. I've missed your outstanding work.  A few LB contributor posts on Zero Hedge would be, for many, frosting on the cake.

I quote a column from days gone by, May 15, 2008, to be exact: Looting the Vaults at the Central Banks | London Banker. It began:

“When I was a young central banker, we often spent our lunchtimes debating how best to rob our employer. Tempted by the thought of great mounds of gold ingots far beneath us in the third sub-basement, nestling deep in bedrock, we would speculate on the viability of various plans for plundering our nation’s store of wealth. The presence of sufficient security forces to defend a medium size city and enough steel around the vault for a battle cruiser only spurred our youthful imaginations. After some months of fantasy gold robbery, I began to assert to my colleagues that stealing the gold would be foolish as it would be impossible to get away with enough gold in city traffic to make the attempt worthwhile, and selling it in any sizeable amount would lead to instant detection. I argued instead in favour of stealing the wheelie bins of cash conveniently lining the hallway to the loading ramp. Cash would be faster and easier to steal and more liquid to spend than gold.

“I see now that I was a central banker of very little brain – and lacking ambition. The way to rob a central bank efficiently is to be a bank executive so skilled in financial engineering that I take my bank to the edge of extinction. I can then swap all my unpriceable, illiquid, engineered credit instruments for good central bank cash and Treasuries. That’s larceny without risk, making the central bank a complicit partner in the looting of its vaults, and earning gratitude and bonuses instead of audits and indictments...

And concluded:

“Without transparency of central bank facilities and policies, there can be no accountability for misuse of public resources and abuse of the public trust. Transparency provides an essential check on bank mismanagement, even for central bankers.

“When Bloomberg revealed this week that Ben Bernanke lunched with Dimon at the New York Fed on March 11 with key Wall Street bankers just three days before the emergency $14 billion financing for Bear Stearns and five days before the sweetheart $30 billion financing of JPMorgan’s acquisition of Bear (again, the acquired assets the Fed received for the cash are secret), it made me very uneasy. Suspicious minds might think the public interest and integrity of market mechanisms, including the corrective of the occasional failure, weren't foremost in their discussions.

“Whether cock-up or conspiracy, recent reforms set the scene for looting of the central banks on a scale never imagined by my younger self.”

And lest we forget, from the Bloomberg article you referenced:  Federal Reserve Chairman Ben S. Bernanke lunched on March 11 with a Who's Who of Wall Street leaders, including JPMorgan Chase & Co.'s Jamie Dimon, three days before the central bank rescued Bear Stearns Cos. from bankruptcy…
”Other guests included Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein, Lehman Brothers Holdings Inc. CEO Richard Fuld, Morgan Stanley President James Gorman, Citigroup Inc.'s Robert Rubin, Blackstone Group CEO Stephen Schwarzman and Merrill Lynch & Co. CEO John Thain. Alan Schwartz, the CEO of Bear Stearns, was not listed among the attendees.”

What, the boys didn’t include their designated patsy: Ken Lewis?

[deadhead]

Echo...I would love to read more of London Banker.

Please do not be a stranger LB...whadda you say?

[London Banker]

Many thanks for reminding me that I can write powerfully and clearly when motivated.  There's more at LondonBanker.blogspot.com for those interested, though not all to the same standard as the excerpt above.

For now I'm toiling at the financial coalface in a job, and not writing, except to drop the occasional comment here and on Professor Roubini's blog.  I miss the days I had leisure to reflect on current events long enough to write about them, but the work I'm doing justifies the sacrifice.

[AnonymousMonetarist]

Your blog is missed, you're one of the reasons I started mine.

[Anonymous]

perhaps the good doctor can explain why russia, india and china are backing up the truck and loading up the barbarous relic........

[SWRichmond]

Roubini is a moron.

"...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."

seriatim:

• gold has little intrinsic value - as opposed to paper currency-thingies, which have NO intrinsic value at all, are easily counterfeited (and frequently are by their own issuers) and which require men with guns to enforce their tender value / marketability.
• most of its price movements are based on beliefs and bubbles - as distinguished from paper currency-thingies, which have an easily-demonstrated 40-year bubble cycle here in the U.S. that goes like this: default, debase, brag, default, debase, brag...
• As an insurance policy against the tail risk of eventual inflation - tail risk of eventual inflation?  Has the good doctor been in a grocery store lately?
• it may be useful to hold a small amount of gold in one’s portfolio - gruding endorsements from ideologocal opponents are always welcome
• but stocking up portfolios with a fiat currency that has marginal practical use - and of what practical use are Enron stock certificates?
• a zero nominal interest rate - you mean T bills? I agree completely, and besides, why would I loan money to my oppressor?
• high storage costs - You've got me there, one out of nine ain't that bad, but then there's always the Bank of Gaea
• and the price of which is subject to volatile whims and bubbles - looked at USDX lately?
• is totally irrational - let me put it my way: which is more irrational, a) trusting as valuable something that, for numerous reasons, humans have regarded as valuable for thousands of years, or b) trusting as valuable something that unelected people can control the value of, and which requires men with guns to enforce its value?  It makes no sense at all to be paid small quantities of currency-thingies for a days labor when vast quantities of those same currency-thingies can be clicked into existence at the whim of one man.  That is, it makes no sense to the payee, granting it makes perfect sense to the payor.  And isn't that what this is really about?

Call me a goldbug.  Then, in your next breaths, refute my arguments.

[Rusty_Shackleford]

fxxkin-A.

[Molon Labe]

Well, now that you put it that way...

[Gordon_Gekko]

+100000

[nicholsong]

Well done.

Methinks the Roub is on the wrong end of some gold action and is talking his book.

[anarkst]

Roubini is all about Roubini.  

[WaterWings]

Fecking great!

Whenever the Fed says inflation we should think, in our little brains, 'percentage increase, year-over-year, of official counterfeiting'.

as opposed to paper currency-thingies, which have NO intrinsic value at all, are easily counterfeited (and frequently are by their own issuers) and which require men with guns to enforce their tender value / marketability.

[TumblingDice]

All of your arguments are correct, but I disagree with on whether gold is the best place to put your fiat money to "work". This is based on a personal conclusion of mine that we are in the middle of an irreversible trend that will last the lifetimes of everyone posting here: things of extrinsic value will outpace things of intrisic value.

Oil has the advantage of having a much higher intrinsic value and of a diminishing, as compared to gold's constant, supply.

[merehuman]

It may turn out the gold and silver bugs will save the country.

Assuming a financial collapse (within sight) of our country someone must have collateral to  hire, to build and reconstruct the business sector.

I have no desire to rebuild with borrowed money of dubious value and repeat the mistakes of the past.  (borrow from who..? and be beholden to?)

This coming year many will have their treasure ,like mine, in the garden. Next fall I anticipate a bounty in potatoes, squash, carrots ,silver and gold.  My PM has already been planted/buried.

Nor is this a selfish deed, growing more than i need and gladly sharing it as i did last summer. But sharing is a must in our future , because none of us can truly stand alone and meet all our own needs. To share , one must have!

Gold and silver  can still be bought . NOW. But there is a limited supply , and it can still be bought with paper ! Oh Yeah!

[Anonymous]

No high storage costs for you.

[tip e. canoe]

"Nor is this a selfish deed, growing more than i need and gladly sharing it as i did last summer. But sharing is a must in our future , because none of us can truly stand alone and meet all our own needs. To share , one must have!"

to quote count anton, amen brother.

growing any winter veggies at all?

[Anonymous]

naw! we will only save ourselves. the heck with the mind numbed robots. they have been warned again and again and they laugh. we were the squirrels in august, running around gathering up fallen nuts and stashing them away for the cold winter and while we worked ,the morons in this country partied and did their natural born thing. well what goes around comes around. they stayed too long at the party. is it my fault? nope and there will be no quarter given either in that day. i have a long memory. i forgive but i don't forget.

[delacroix]

cooperation, is the true backbone of progress. I hope the neighbors will barter for eggs

[JR]

Forgive the interruption but here’s one for Tyler Durden.

Alan Abelson, Barron’s today:

“As several wide-awake observers have pointed out, moreover, the so-called Emergency Jobless Insurance Claims, filed by people who have exhausted their regular benefits, at last count reached a peak 4.2 million.  On that score, the pseudonymous “Tyler Durden” of Zero Hedge cautions, “Look for this number to keep going into the stratosphere.”

[deadhead]

golf clap!

thanks for posting JR.

[WaterWings]

Yeah, nice! Nothing like a collective actually being smarter. Muchas gracias.

[jimmyjames]

Gold is not a good hedge against Inflation--

It does hold its buying power,but credit is your best bet--

Gold does well in 3 instances--

Hyper-inflation/currency collapse--political instability and it does the best,in Deflation--

It's never about the price--

It's always about buying power--

Same as with the dollar,it really doesn't matter how many dollars you hold,its about what your dollar can buy--

Gold is increasing its buying power,all assets are deflating against Gold,they did in the 30's as well,the dollar was locked to Gold and so it was actually Gold--

Thus the saying--cash is king in deflation--

Today we have a choice of which cash we wish to hold--

My choice is Gold--

[Anonymous]

Is Roubini aware the amount of money spent on Beauty?

Feminine Beauty, Architectural beauty, Automitive Aesthetics, Decoration etc?

According to Roubini, diamonds have little value as well.

In fact, Emeralds, rubies, gold, diamonds, paint, all worthless. That's his logic.

-MobBarley

[Sqworl]

Hush, his ladies should not know that he thinks this way....

[delacroix]

maybe I should stockpile a little mascara, and lipstick. nylon stockings, were good as gold in WW2.

[Anonymous]

Gold britches?

http://cdn.buzznet.com/media/jjr//2009/08/olesya-gold/olesya-rulin-gold-...

Gold has a lot of intrinsic value. Intrinsically, it's:

1. Scarce
2. Compact
3. Unusually corrosion resistant
4. Not radioactive
5. Not chemically toxic
6. Unusually malleable
7. Identifiable
8. Diamagnetic

Well ok, I just threw that last one in. But what's not to like?

And I'd bet you that Roubini couldn't name half a dozen things that are diamagnetic, just off the top of his head.

[Anonymous]

Gold is great for the producers and the trading house that sells and buys it back. Everyone else is just kooky. Reminds me of the precious Gems I have in a safe that have an appraisal of $500,000 but no one but a fool would pay more than $5000 for. Gems were all the rage as well. Gold is a tulip market.

[SWRichmond]

I can't begin to tell you how many times I've seen this argument: "Gold is bad, and I'm rich, which means I'm smarter than you, so you should believe me."

[bilbert]

Yep!! good thing your "precious gems" are all 99.99% pure, easy to verify content, and not prone to visible occlusions or variations of cut, clarity or color.

That's likely why I'm seeing so many "buy your questionable gemstones for cash" signs littering the many thoroughfares of my city.

BTW - did YOU pay more than $5,000 for your "gems"?

Can you say: "non-sequitor", or does logic defy you with its complexity?

[Anonymous]

The need to pay down debt will force people sell their gold ... last month I read an article about a commercial bank that bought a record amount of gold this year from the population.

As deflation becomes stronger and stronger, more and more assets need to be sold to be able to make the payments.

In a fractional reserve monetary system money is debt. Contrary to popular believe, central banks DO NOT PRINT MONEY, they lend to create money, because MONEY=DEBT, debt that eventually needs to be payed back with interest.

For such a monetary system to work, you need exponential economic growth, otherwise the existing debt will crush everything.

[Anonymous]

Yes but what if that lending new money into existence idea includes lending newly printed money in exchange for horribly impaired collateral. MBS used as collateral for money from the fed, with the fed paying par value, and including the proviso that the debt may be infinitely rolled over. The taxpayer or currency holder is ultimately responsible for that malfeasance but his input in the decision making is neither solicited nor considered.

That is printing. That is inflation. That is debauchery of money. That destroys confidence. That disincentivizes man's natural yearning to acquire beyond meeting a sufficiency of his needs. That decompression from producing a superabundance to more modest or even survival level crushes an economy. Gov't jumps to fill the gap, but only with more money not production.

Hyperinflation, destruction of currency, collapse of savings and impoverishment of the middle class.

The ugly underbelly of fiat currency and fractional reserve banking made virulent by state sponsored fraud and accounting corruption. Devestation and famine of all physical supply.

[Anonymous]

I think Silver Bullet is on the right track . Since 1971 the whole world started to believe in pieces of paper (fiat currency). Since that time we have devalued the fiat currency close to zero. So now we cannot collectivley make up our minds if gold is a commodity or currency. If we decide it is a commodity or a currency it is still tied to fiat currency.

[Missing_Link]

Buy mithril!

[MsCreant]

Could you make, like, an AR or AK out of that with pluses to hit with each shot?

[Anonymous]

I am the author of new book - SUB PRIME RESOLVED – which contains a brilliant investigative expose "Where is Mackenna's Gold". This conclusively proves using official figures that United States has lost 6297 of 8134 tons of gold in surrepticious hedging operations. Visit the following site to buy this book and read the Chapter 14 which is a 30 page expose. What you have been doing for over 10 years, but unable to prove to the American people, is proved in this book.

Also read my latest article "GOLD $6400, SILVER $80 - why would they be at" in my blog http://anilselarka.com
My Book website: http://www. subprimeresolved.com

You can download PDF file of that article by visiting my blog from Box.net sidebar under Articles or by visiting Scribd website

http://www.scribd.com/full/23489978?access_key=key-1uqrl4i09fxxy3bk8ykp

[Anonymous]

on the other hand, I must say it's my 1kg bar of gold looks pretty great in the safe.

First I thought about buying bullions, but they don't have the flair.

[nicholsong]

Uh, your formed gold brick stamped with 1kg is not bullion?

The definition of gold bullion is: a refined and stamped weight of gold.

Methinks you are talking out of a paper asshole.

[Fish Gone Bad]

If you want to hedge against inflation, stock up on Spam or other canned food - This is good advice in general.  At some point in everyone's life, a disaster will occur.  Keep at least a few days supplies of basic things you need everyday.  A few cans of spam, some corn, beans, water, etc. 

[milbank]

If you want a hedge against inflation, use my favorite...

Forever stamps. ;-|)

[Anonymous]

Stock up on lead. Pass the ammo.

[john_connor]

"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."

I agree and disagree.  Sure, the transition between contraction and expansion is not likely to be orderly, but the analogy to Greenspan as a perfect case study is a dangerous assumption considering our situation now is much different compared to 2001.  Greenspan had the fortune of having housing as an outlet to create another bubble after the Nasdaq crash and 9/11.  Then, banks were very willing to lend, and consumers were very willing, and had the capacity, to lever up and borrow.  Add in deregulation, lax underwriting standards, and the rest is history.  This was the perfect storm to set up the bubble of all bubbles in a debt based monetary system.  So, fast forward to 2009, the bubble has burst and we are on the other side.  How can the Fed "transmit" its monetization of toxic mortgage backed securities into the real world?  Are the banks lending and are consumers borrowing?  Well no, as everyone already knows.  What is missing is that current asset prices (at least what remains post 2007) were a product of 40-1 or higher leverage taken on by banks, all on the backs of middle class borrowers who overextended themselves.  With 40-1 leverage, it only takes 2.5% bad loans to make one go broke.  In the end, the banks are still insolvent and middle class borrower is deader than dead.  In this situation, asset prices in a debt based monetary system have nowehere to go but down.  The counterfeiting machine is broken, and it will be broken until the banks take losses, and the middle class is able to get a job with sustainable wage inflation.

People will say "But the US government is taking up the slack from missing private demand."  True, but they are barely putting a dent in things.  And how about our governments ability to take on more debt without drowning in interest expense?  That is laughable indeed.  The O team is already taking a huge amount of heat about the deficit, and the kitchen will only get hotter as mid terms approach.

What does this mean for gold?  In the context of my argument above, the argument for gold going to 6K has the same likelihood as Taleb's six sigma point of singularity for equities.  That is; it is unlikely.  Can it go up from here?  Sure.  But as I have said before, I'd rather hold physical as insurance.     

[delacroix]

fiat currency does not have to be destroyed, to drive gold up, just damaged.

[john_connor]

Agree, but that wasn't my point.  My point was that you can not use Greenspan's low rate world of early 2000's as an comparative case study as to why hyperinflation will happen this time, thus resulting in gold going to 6K (or infinity) as a result.

[Anonymous]

Floating the dollar and expanding the money supply has had wonderful effects in the past 30 years. The dollar has really held its value well, espcially in terms of purchasing power. Ask Roubini if he would rather have his salary paid in terms of gold, dollars or spam.

[Eye]

Our country has had the most expansive economy the world has ever seen over the last 50 years.  The money supply has now expanded far beyond our growth or growth potential.  Past performance is no gaurantee of future performance.

[Anonymous]

"Tiger" Woods is an excellent window into the society. Since he has been involved with golf, the sport has had declining tv ratings, decrease participation, and decline in real sponsorship. It has also seen hundreds of golf courses collapsing into bankruptcy. Yet it is still on tv. Yet RSBC, CITI , AIG,etc (all bankrupt) continue to sponsor this bankrupt game. The stupidity and fraud know no limits here.

[jules from aus]

And people will exchange stuff for gold just about anywhere around the globe - except perhaps Eskimos, as they already have oceans of food and living skills most other cultures largely gave-up eons ago for the Spam factory way of life - which again, can mostly be bought with gold just about anywhere someone wants to sell you some Spam

[jules from aus]

though I did notice a YouTube clip recently where this guy on an American beach was asking morning joggers if they would like to buy a Canadian mint one ounce coin for US$50 - no one had a clue, and no one took up his offer

[jules from aus]

anyway, after his great effort to pen that piece I'm sure Nouriel was looking forward to a relaxing Sunday, reading the papers and catching glowing remarks in support of his effort

instead - he got Tyler slammed

ouch

[Anonymous]

Goddamn it. If I'd been there I would have run to the nearest party store and loaded up on disguises so I could keep coming back like a fat kid hitting the free ice cream sandwiches.

Yours $50, how do you remain?

[BorisTheBlade]

Roubini is firing @ down gold from all weapons, we are up to something. "It's called a changeover, the movie goes on and nobody in the audience has any idea"

[DavosSherman]

Glad I didn't pay to take his class.

[Anonymous]

I'm always glad to hear gold bubble accusations as it gives me the chance to trot this out:

A gold bubble? That would be terrific, thank you. Please let me know when we have the following in place:

A $250K/$500K capital gains tax exemption on gold (as opposed to taxing all capital gains in gold at the higher short-term tax rate, regardless of how long it's been held).

A "President's Working Group on Gold Markets" to support the gold market in the event of sudden sell-offs.

A tax deduction for interest on margin debt used to buy gold.

A "Federal National Gold Association" and "Government National Gold Association" who use taxpayer money to purchase margin debt used to buy gold.

Thousands of government boondoggles at the federal, state, county, and city level to promote "The American Dream of Gold Ownership".

It should be possible to buy physical gold, or to go long on gold futures, on 0% margin. There should be thousands more government programs to "help people keep their gold" and prevent repossession of physical gold when buyers default on their payments.

A "National Association of Goldsters" whose sole purpose in life is to chant "They're not making any more gold", "Gold never goes down", and "Buy gold now or be priced out forever". This NAG should be one of the most powerful lobbies in America, and their members should be quoted by the media as though they (1) are disinterested parties and (2) know a fucking thing about economics, or, for that matter, anything else.

Individual retirement plans and pensions invested wholly in gold, so that supporting the price of gold becomes a matter of national security. Any hint of a gold price crash should lead to congressional hearings and SEC investigations. Anyone who shorts gold futures should be decried as "un-American" and a cowardly leech who profits off others' misfortunes and deserves to be destroyed by short squeezes. Most importantly, anyone who complains that gold is overpriced should be derided as a "bitter fiater" who missed the rally and, furthermore, can't get laid.

[jules from aus]

funny

[BorisTheBlade]

Touché Anon

[hidingfromhelis]

Well done!  (clap, clap)  That really puts things into perspective, doesn't it?

[Anonymous]

Beautiful commentary.

[nicholsong]

Genius.

I'm showing this to others.

Thanks, whoever you are with your big sexy witty brain.

[Anonymous]

Thanks all, my pleasure.

[Anonymous]

Tuesday, November 10, 2009
roubinis-remarkably-wrong.html">Betting Against Roubini Is As Good As Gold

There can't be too many people left who wait to see what Nouriel Roubini has to say until they place their market bets - unless it's to bet against Roubini's view. And it's a good thing for Nouriel that he gets paid as a university professor and not as a market speculator - although, if I were one of his student's I'd be pissed about having to pay for his professorial garbage. As per The Wall Street Cheat Sheet:

"If you followed his bearish advice in 2005, you would have either missed the entire rally through 2007, or you would have lost money shorting the market. If you would have followed his advice starting on March 9, 2009, you would have lost a ton of money. We should also note that Roubini said Oil would stay below $40 a barrel for all of 2009"

Here's the link, which has a nice chart of Roubini's consistently wrong market calls: roubinis-horrible-trackrecord-in-2009/?p=3513/">LINK

For public record, I would like to note that Roubini recently has decreed, several times, that gold is going to go lower. I'm not sure you'll find a better bet in the history of the universe than taking the other side of that call.

My view is that Roubini has been working hard for an appointment to Obama's Council of Economic Advisors.

[awgee]

I am a bit confused.  In the following quote from the article, "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.", is Roubini refering to gold as a fiat currency?

[msorense]

I was shocked to see this too.  Roubini is the relic sadly.  He was great back in Sept. 08 (remember the freight train) but it's like he is jockying for a position in the Treasury Dept. or something. 

[awgee]

Isn't a fiat currency a currency which has been declared as the only legal tender by the government?  As far as I know, gold has not been declared to be legal tender.

[Orly]

He is referring to the fact that by "fiat," one states that something has this value, when in reality, it doesn't have any other value than the stated one.

He is saying that gold has no intrinsic value except what people say it is worth.

He is right.  Gold is otherwise useless unless people believe it has value, which it really doesn't.

Gold is a fiat commodity, not a currency, so I may argue with his semantics just a bit.  Gold is not "issued" by any government or country, so it is not a currency. It is, however, just as useless as a printed governmental central bank-issued note.

[golden_shinebox]

Gold (and silver) 'coins' are legal tender as they are struck by the U.S Mint which is a department of the U.S. Treasury.

http://www.treas.gov/education/faq/currency/legal-tender.shtml

"The pertinent portion of law that applies to your question is the Coinage Act of 1965, specifically Section 31 U.S.C. 5103, entitled "Legal tender," which states: "United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues."

See also: http://www.treas.gov/education/duties/bureaus/usmint.shtml

Face value of a Gold American Eagle is $50 dollars. Face value of a Gold Canadian Maple Leaf is the same.

Gold is not a fiat commodity. Sometimes Paper Bugs can't see the forest through the trees.

[Anonymous]

http://www.goldensextant.com/SavingtheSystem.html

"With respect to the form the denouement will take, much has been written within the gold community on the subject of whether we face hyperinflation or deflationary depression as the prelude to monetary collapse. Both sides of the debate appear to accept the premise that whatever may transpire will bear a linear relationship to what now exists. The disagreement centers on the direction the line will go. But today's markets are fully linked by derivatives and technology, and they are patrolled by wolf packs of large, leveraged speculators not noted for their patient outlook. So it seems likely that the terminal monetary crisis will unfold on virtually an instantaneous and discontinuous basis, once the fog of statistical deceit and false market cues begins to lift and a clear trend either way becomes evident. We are not likely to enjoy the luxury of observing either a deflation or an inflation unfold in the fullness of time, but rather, just as Mises foretold, a final and total catastrophe of our fiat monetary system."

http://www.goldensextant.com/Gold%26Deflation.html

"So rather than try to figure out whether we face deflation or inflation, then make a stab at executing the corresponding investment strategy, it seems to us the investor not desirous of losing money -- or worse -- in the days ahead should just step back and ask himself some simple questions:

Do I agree with Keynes that our fiat dollar, the Federal Reserve Note, is the end of monetary history? If yes, then I should pay no attention to that chorus of suits now speaking in tongues, and I should stay away from gold. I belong in my broker’s investment du jour.

Do I think it merely possible that our fiat dollar will someday collapse? If yes, then I should own gold. How much? As much as I can comfortably rationalize, perhaps using some sort of calculation of the gravity of the harm -- i.e., financial wipeout -- discounted by my sense of the probability of its occurrence.

Do I think it inevitable that our fiat dollar will suffer the fate of all paper currencies throughout history? If yes, then I am a gold bug, and it is my dollar exposure, not my gold “investment,” that I must rationalize."

[Anonymous]

Some borrowed commentary on roubini's analysis:

Roubini is yet another one dimensional economist who misses the bigger picture of monetary risk. It has nothing to do with inflation/deflation, mere symptoms of the disease; it has a great deal more to do with debt "liabilities" and the C WORD of monetary risk.

I am amazed he has yet viewed a US TREASURY DAILY STATEMENT. When I first saw a US Treasury Daily Statement I said to myself ... "SELF, LOOK AT ALL THOSE STACKED LIABILITIES ... EVEN THE ASSETS ARE LIABILITIES"! The liability side is HUGE; the asset side is tiny, if you look past the combined "marketable" and "non-marketable" US DEBT, which boils down to income/payroll tax revenues and excise tax revenues. In actuality a true accountant would look at NET tax revenues, which is even a much smaller number than actual gross tax revenues. Gross tax revenues is all that is ever broadcast in the mainstream, but everyone always forgets that the US government has to issue something we US taxpayers are very fond of ... "tax refunds"!

Who among us when we do our budgets counts credit card "available credit" as "income"? The US Treasury does as they place DEBT ISSUES on the asset(receipts) side of the Balance Sheet ledger, which is what a US TREASURY DAILY STATEMENT is. The US Treasury commingles debt and tax revenues as one, as receipts ... as assets.

Let me just say that if the US Treasury were forced to live just on NET tax revenues we would have to cut Social Security checks and Medicare benefits by 70%(recall the US Treasury Daily Statement calculations I did for October 20th). In fact the entire US government would have to shrink 70% so we would have to quit policing the entire World by 70%! Close 70% of our foreign military bases and shrink our troop size by 70%. That is a hell of a lot of “shrinkage”. That is 7 out of every 10 Federal Employees and Military personnel jobless. Imagine what that would do to the unemployment rate.

Where Roubini’s stance on unending US DEBT? The US TOTAL DEBT is one huge liability that makes the AIG derivative counterparty liability look tiny. Last year (FY 2009) the US DEBT liability ended over $54TRIL USD. Right now the FY 2010 US DEBT liability is already over $3.3TRIL USD.

Further ... on THE DEBT CEILING ... It first started in 1940 with $45BIL. That was 70 years ago and now it is $12.1TRIL USD! Guess what? They need to raise the debt ceiling again and soon since US PUBLIC DEBT is at $11.9TRIL right now. What have we learned from 70 years of Congressional DEBT CEILINGS? Roubini?

So what is gold? In my view it is the only financial entity in the World without liabilities. Gold cannot file bankruptcy or default on its DEBT payments. Gold has no US TREASURY DAILY STATEMENT since gold, unlike the US Dollar is not a "debt derivative". Speak to that Roubini ...

[THE DORK OF CORK]

Mwrryn Sommerset Webb in Saturdays Financial times is again very Bullish on Gold refering to Bill Bonners simple trade of selling dollars and buying gold in 2000.

She suspects that he is still buying stating "This makes perfect sence: nothing has changed since he made his first gold call except the scale of the currency debasing going on around the world"

[Anonymous]

That is correct. The markets are now more distorted, the underlying reality is worse, and the hubris and ignorance are greater than before the "bust".

[AnonymousMonetarist]

FWIW, my views on gold are bipolar...

Either $750 or $3000 perhaps both in the next few years...

Think the Black Swan is if we muddle through which would suggest gold within a much tighter range..

http://anonymousmonetarist.blogspot.com/2009/12/mr-hands-wild-ride.html

We speak of a mild outcome to all this, a new normal, as we stuff the pig on the scale of fate. We are so far down the rabbit hole Alice, so arse over tit, that it is quite plausible that the power law being applied here is masquerading mild as wild as well as its' converse.

What if the mild prognostication is deflation or hyperinflation with either A cascading to B or B cascading to A?

What if the Black Swan is just, hope upon hope, muddling through?

[Apocalypse Now]

My thoughts as well, dependent upon central bank actions - more upside than downside.

The two questions in my mind are:

1. The degree of leverage used in gold & gold mining shares (all leverage will decrease)

2. How much wealth will stay in investments before being liquidated for survival spending

* If the money stays in investments, asset allocations will move to gold = gold >$2000

* If the wealth is destroyed en mass along with demographic baby boomers pulling out for retirement spending = gold <$1,100.  An example of this would be valuations being cut in half on P/Es based on less than expected future growth rates and/or increasing interest rates (higher WACC discount rate).  This could happen overnight.  It is scary what people are investing in these days - on a no dividend stock they have very little claim on anything.  Imagine Goldman Sachs with hardly any dividend and paying out billions in bonuses - what claim do the shareholders really have?  I think of some shares as worse than cash due to the high P/E - as with cash there is no income, and subject to devaluation with dilutive secondary offerings (just like inflation with more money printing).

[awgee]

Roubini is bearish on gold.  Is he actually shorting gold, or just talking?

John Paulson is bullish on gold, and acutally buying gold and gold mining stocks.

If I want to teach a class or write an article or spew on bubblevision, I guess I would ask Roubini for his advice.

If I want to make money, I would ask Paulson for his advice, or maybe just copy him.

[AnonymousMonetarist]

Who the hell knows?

Paulson may be a rhyming Livermore.

If the debasionista thesis pops, it'll be too cold for him go jog 5 miles....

[msorense]

Paulson is also bullish on BAC and Citigroup I think.  Maybe it's a hedge against his gold position.  I don't know what he's thinking because when this shit is all said and done the shares of these banks will be close to zero.

[AnonymousMonetarist]

Paulson is a debasanista.

[demsco]

Roubini has become too full of himself and, IMHO, has lost grasp of reality. He was/is a one hit wonder, period. Gold is not a bubble, production is down, demand is up and this guy teaches economics?? I believe gold will spike down hard, I hope it does so people will shut up about it, but when you have commercials trying to buy, not sell, your gold it is not a bubble. I do believe other metals represent a better value right now, silver and palladium and maybe even platinum, but gold has been a stable buy over the past few years compared to, gee I don't know, anything.

Gold was a bubble at $450, 'nuff said. Very happy with my position and based on the future public lending facility Obama and Tiny Tim will set up I am willing to bet money velocity goes through the roof. What that does to inflation? I don't know, no one does because this was done 1 other time when money had a back stop, ironically that back stop was gold, but it will definitely distort inflation beyond what these idiots can comprehend.

[jules from aus]

but what is going to be the trigger for an explosive increase in velocity, when as Rosenberg keeps beating, the consumer has pulled-up stumps and isn't going to play anymore - they are simply saving and paying off debt

do you think it will come from wage inflation? how - people haven't shown a sign of returning to former spending, so the corporations can't afford the margin squeeze

will the banks simply turn the taps on again and start lending? --- well maybe that is the only old fashioned way -- but how do they entice the consumer back? -- 2% credit cards??

I think Rosenberg's views on his 'new non-consumer' is going to pose a real problem for getting velocity up again - clearly just lending to companies won't be enough, unless it is for some crazy way to force consumers back to the trough of consumption, by freeing up capital for companies to afford the margin squeeze

it is simply all so unclear at the moment...perhaps once we see this bear rally finally loose steam and drop the other way, at least then we can start talking Japanese (models) again, but until then everything is so god damned unprecedented

[bokapita]

"will the banks simply turn the taps on again and start lending? --- well maybe that is the only old fashioned way -- but how do they entice the consumer back? -- 2% credit cards??"

Exactly, you will not entice them. The economist also fails to appreciate that ZERO interest rates will NOT spark an orgy of borrowing BECAUSE the consumer cannot afford to repay the principal sum, let alone any interest. Do I want to eat this year or to buy a television at 0 percent?

Thus the importance of an apprenticeship in the real world. Cash flow is King, and it is this, and this only, that caught Enron, Bear Sterns, Lehman and is catching the FDIC failing banks and will catch all banks in time (even if via total disbelief in Zimbabwe-style printed money).

People are sensible -even if inarticulate by some academic standards - and they fully understand the difference between a THING (I've done my money) and decision power (I still can choose what to do with my money, and I do not need any more consumer garbage).

This is the problem for the system, and it will not, or cannot, face up to it and restructure.

[delacroix]

by the time this plays out, roubini will let you screw him in the ass with a gold dildo, if you let him keep it when you're done.

[AnonymousMonetarist]

Or to say it in Taleb Talk, who knows what the Assumed Exponent of the Hand is?

[Thurgy]

:P

[dot_bust]

Roubini is simply mad because the Comex's paper
gold Ponzi scheme is about to end...badly.

I strongly believe the recent run-up in gold prices
was due to the covering of short contracts.
Conversely, the sudden drop in gold prices is from
the dumping of long positions on the Comex.

The insiders know what the assayers are finding
in Hong Kong as 400-ounce gold bars are each
drilled with four holes for authentication. Many
will, as analyst Jim Willie says, contain tungsten
instead of gold.

Panic will then ensue as entire governments scramble
to obtain real gold. Those with one-ounce gold coins
and one-ounce bars are in excellent shape, as
items with that weight are easily authenticated.

Expect Comex executives to be lead away in handcuffs
when everyone finds that they violated contract laws.
They sold contracts for metals that they don't possess.

[delacroix]

and the recent drop, was mainly, dumping of etf shares

[The Original Da...]

This is perfect.

Can't wait for hundreds more of these types of pieces from overrated, over-publicized economists lambasting gold thus driving the price down to levels where I will most certainly be buying.

Keep piling it on. I'm looking forward to getting back to "contrarian gold buying" rather than "momentum gold buying." It's much more enjoyable that way.

[The Original Da...]

And for the record, I don't think any of us believes, "the world is going to end." It is however going to look very different. I'd much rather be holding gold before it reaches there seeing as how gold has been around for centuries while the dollar has only been without its backing for a mere 30+ years.

The dollar is still an experiment that has gone badly wrong. What was that quote bv Rosie? Something like, "this country has been around for 234 years but half of the money supply was created in the last 2."

[Anonymous]

no, the world will never come to a "end" so to speak.
but the world as we have known it and as our parents and grandparents have known it, ... is, i am afraid, coming to a end. this is why the comments about uncharted territory continually come up. we are in uncharted territory and will be for the foreseeable future. many can see more or less where we are going and what will happen, but the details of such things are privy to a very small number of people, the ultimate insiders.

[delacroix]

the US could look a lot more like mexico, in the future. most everything functions, but corruption, will be a commonly accepted feature, as well as a pronounced reduction, in opportunity to prosper in business.

[GoldSilverDoc]

I find it strange, reading the comments of folks like Roubini. 

Underlying his entire argument is an unstated premise; that is, that fiat currency is and will continue to be "of value".  The "no intrinsic value" argument against gold is specious, since the ONLY reason it appears to be true is because everyone "values" gold in terms of some fiat currency.  Turn that around, and the idiocy of the argument becomes apparent - in the contest between two things, neither of which has "intrinsic value", neither of which is "used in industry", neither of which is a "valuable commodity" because of some utilitarian use that it many have, which is the most (least?) desirable:  1) a fiat currency, with value given it ONLY by the force of a government 2) an inert, difficult to mine, easily recognized metal which exists independent of a government?  

I don't know what a "gold bug" is, actually.  I just know what money is, and isn't.  The fiat currencies are controllable by venal politicians.  Gold is not.  

Picture this - suddenly, the US government determines that little pieces of green paper, produced by a monopoly and protected by threat of force against anyone who attempts to duplicate them, refuse to take them, or use another trading substance, are "worth something".  They have no "intrinsic value", no "use in industry" except as fire fuel, and are inedible.  Oh.  Wait.  This already happened.  Never mind.

[Catullus]

Applause.

Intrinsic value belongs in the dustpan of ideas. An individual values something as whatever they would be willing to exchange for it. Value is not objective, it is subjective to individuals.

You learn on the first day of economics class about the concept of opportunity cost. To speak of intrinsic value is to fundamentally misunderstand the priniciples of economics. Intrinsic value is only "barbarous relic" here.

[Anonymous]

Ameana puella defututa
tota milia me decem poposcit,
ista turpiculo puella naso,
decoctoris amica Formiani.
Propinqui, quibus est puella curae,
amicos medicosque convocate:
non est sana puella, nec rogare
qualis sit solet aes imaginosum.

Si quicquam cupido optantique optigit umquam
insperanti, hoc est gratum animo proprie.
Quare hoc est gratum nobis quoque carius auro
quod te restituis, Lesbia, mi cupido.
Restituis cupido atque insperanti, ipsa refers te
nobis. O lucem candidiore nota!
Quis me uno vivit felicior aut magis hac est
optandus vita dicere quis poterit?

[SWRichmond]

Value is not objective, it is subjective to individuals

Yet another compelling reason why command economies are doomed to fail.  Central banking is the keystone of any command economy.

[Anonymous]

why any one need to believe him when he is a big, fraud false prophet.

http://wallstcheatsheet.com/breaking-news/economy/is-nouriel-roubini-a-f...

http://www.youtube.com/watch?v=aUT9NsVZEPY

[Anonymous]

The shadow gov't and shadow banking certainly had its day in the sun.

Perhaps the quiet but tenacious gold-acquiring crowd are becoming the shadow revolution.

They are repudiating debt and debt instruments especially currency and taking the macromanagement of their affairs back to themselves where they may better steward their resources.

They are tired of being chattel and the playthings of political and financial constructs which exploit their energies but deny their management inputs. That in short is slavery and every freeman bristles at it.

Purchasing gold to preserve a portfolio is akin to throwing off chains and demanding emancipation.

[SRV - ES339]

Mr. Roubini is just selling books and public appearances (that's what he does)... nice detailed rebuttle though... thanks.

ZH... COULD WE (YOU) PLEASE TURN UP THE HEAT ON GOLMAN STILL BEING A BANK HOLDING COMPANY, SINCE THEY ARE NOW ROLLING IN CASH. Was this not a temporary, emergency measure and, as such, why is it still in place (we know why, but I'm doubting Treasury could use the truth as an excuse)?

[Gordon_Gekko]

Who gives a fuck what Roubini says?

[milbank]

Apparently you do Gordo considering you've made a over a half dozen posts (albeit, 5 out of the 6 are nothing more than band width fillers) on this thread. 

You know, since you obviously have nothing to do (and, let's be frank, nothing to add here), there are still probably some weekend jobs for the holiday season to be filled at Walmart, etc.

[Gordon_Gekko]

Thank you. Now fuck off.

[milbank]

It's OK Gordo.  Attracting those like you who have a need to show the world how little they have to say is the price a discussion site pays for becoming popular.

[Burnbright]

Pot meet Kettle.

[Anonymous]

From Campaign for Liberty...

On December 9, 2009 Congressman Ron Paul introduced the H.R. 4248 Free Competition in Currency Act.

This bill would do thee things:

1. Eliminate the legal tender laws.

2. Eliminate laws that prohibit the operation of private mints.

3. Eliminate capital gains and sales taxes on gold and silver coins.

It's time to start writing your congressmen. Encourage them to cosponsor this bill. Let's give the Fed some competition!

[SWRichmond]

W00t!

[Anonymous]

"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."

Gold is rare, is chemically relatively non-reactive, non-perishable, and in small quantities, easily transportable. These are all characteristics (the first and last ones particularly) that make money what it is -- a consistent standard of exchange that is easy to transport and relatively difficult to fabricate/replicate/counterfeit. (Gold also has a relatively low melting point and is malleable, which are desirable for producing coins.)

Food, oil, or other similar commodities do not fit the bill (pardon the pun). Food is perishable. Oil needs some sort of reservoir. Both would require huge amounts to conduct a transaction of any size, so they are not easily transportable, etc., etc. They are not money.

While you can eat (at least theoretically) and burn your fiat currency, bonds, and other paper instruments, at that point, they are worthless. However, people will still need a form of money even if the paper forms disappear. Gold, silver, and similar things will continue to suffice. They have for a long, long time, and will continue to do so. Nixon and the Keynesians have not changed this.

Incidentally, I think James Grant and Roubini have been in a sort of pissing contest of late. Roubini's post is possibly a riposte to this article:

http://online.wsj.com/article/SB1000142405274870434240457457576166048199...

[Instant Karma]

I never bought gold until this year. The factors in my decision(s) were as follows:

1) Gold had been in the 300s since the 1980s. Since then, the US has amassed 12 Trillion in debt, and counting. Servicing the debt will become less and less manageable and will cripple the economy through higher taxes, interest rates, and a lower dollar.

2) I am convinced politicians cannot do basic addition and subtraction and are oblivious to the hole we are already in and its just getting deeper. Like many state governments, the Federal Government is essentially bankrupt, living off of 0% credit cards.

3) The fed can't raise, like Japan, because raising rates would kill the banks, kill the real estate market, and, cause a dramatic increase the cost of servicing our national debt, much of which is denominated in short term bills and needs to be rolled over frequently.

4) I bought gold because it is a portable and to a degree hidden source of wealth and savings. I also like Australian Dollars.

5) America and the dollar peaked in 2000 and both have steadily declined since and will continue to do so unless hard choices are made. Notice the Fed raising interest rates in the mid-2000s did little to support the dollar nor did the price of gold decline.

[SWRichmond]

The fed can't raise, like Japan, because raising rates would kill the banks, kill the real estate market, and, cause a dramatic increase the cost of servicing our national debt, much of which is denominated in short term bills and needs to be rolled over frequently.

I agree, Bernanke is trapped (and it couldn't have happened to a nicer guy).  They have hosed the system with a liquidity firehose and have only managed to slow the rate of firings and the rate of decline in real asset values.  The world has woken up to the currency debasement theme.  The solvency problems remain, not the least of which is the sovereign solvency problem.  No resolution in sight.

[Cursive]

@ All Gold Lovers

I am not a Roubini fan and am only interested in serious answers to questions that I have about the eventual usefulness of gold in an a.) unstable social environment, b.) SHTF-type situation or c.) EOTWAWKI situation.  The following questions are concerns I have about the usefulness of gold as a long-term investment in the aforementioned situations.  The gold debate is often a highly-charged, emotional issue and I don't want start that here.  If you will, take my concerns as an extension of the example from Alas, Babylon, a novel about a post-nuclear America.  One of the characters has stockpiled large quantities of gold only to die from eventual radiation poisoning from his gold hoard.  So, here goes: 

1.) How many commentors on this thread are holding physical gold as opposed to an ETF?

2.) If it is phsyical gold, what is the best way to store it?

3.) If it is an ETF, are you concerned with potential abrogation of contract or inability to take physical delivery?

4.) If your gold is stored with a custodian, are you concerned about eventual debasement of your reserves (e.g. tungsten) and how would you prevent such a debasement?

5.) If the USG (or relavant sovergn of your jurisdiction) decrees that gold should be confiscated, a la Roosevelt, how do you plan to keep anything other than nominal reserves?

6.)  How do you plan to "cash in" your winnings once gold hits your price target, short-term, intermediate or long-term?

7.)  If there are future opportunities to transact for goods and services using gold, how do you plan to denominate your gold holdings or, more precisely, how do you subdivide your gold holdings into the exact quantity for the transaction (e.g. buying soap - or do we make our own soap in the future)?

[SRV - ES339]

For what it's worth... my gold investment is in a Canadian (not US) Precious Mineral Fund... a broad selection of solid gold miners, and about 10% bullion. It's up 30% in the last two months... but is a high risk investment (unless you are confident in gold's long term strength).

[Orly]

I noticed we didn't hear from G. Gekko, describing "all" of his gold "holdings."  And no one else responded to this serious question?

These are all legitimate questions, people.

The way I see it, SRV, is that holding gold is not a wonderful idea.  The only time you'll have any need of it is if the "electronic" money system utterly fails, which obviously ain't ever gonna happen.  The vested interests have their computers wired in quadruplicate.

Holding physical gold is expensive, unweildy and could be quite dangerous to your person, your home and family IF it ever did take off as they say...which it won't.  But in these hard times, times may just be hard enough for someone to find out about it and come and take it from you, even if it is worth four hundred bucks an ounce.

Or...the US Government may decide to do that for you.  Either way, there are much better ways to store your wealth without using precious metals.  The only one that would make any sense is silver because it is historically undervalued v. gold now.  It has commercial and industrial uses (so it is actually worth something...) and will close the gap between current prices and historic prices much more quickly IF that were to happen.

Either way, use silver as a trade but wait for the next leg down before you buy in any serious amount.  Just my two cents worth.

Sorry all these "gold bugs" can't be honest with you and say that they aren't holding anything, either.

[Anonymous]

"The only time you'll have any need of it is if the "electronic" money system utterly fails, which obviously ain't ever gonna happen. The vested interests have their computers wired in quadruplicate."

Sez you. The electronic money system can crap itself quite easily. We already got a taste of lockup, and only the fiat magic machine turned up to 11 got the gear unstuck. Next time, try and imagine it with everyone telling the bankrupt sovereign to sit down & shut up.

"Holding physical gold is expensive, unweildy and could be quite dangerous to your person, your home and family IF it ever did take off as they say...which it won't. But in these hard times, times may just be hard enough for someone to find out about it and come and take it from you, even if it is worth four hundred bucks an ounce."

Sez you. If a person is unable to keep their piehole shut, then maybe they shouldn't hold an extra can of Spam either. Ooh, gold is dangerous? No, it just sits there storing value.

"Or...the US Government may decide to do that for you"

Hah! Only if they are going to remonitize it, but wait - how can they do that after ripping off the world in 1971? Good luck, Orly - you truly sound like the self-important tool who will be the first one kicked in the nuts during the neighborhood crisis pow-wow.

"Either way, there are much better ways to store your wealth without using precious metals."

Without offering an example? See above comment.

[Hephasteus]

Stick your money in the bank and get robbed DAILY. PENNY BY PENNY. Fuck you. Even if I'm not paying attention. Even if I wake up a second too late. I can do a better damn job of securing my assets than willingly and stupidly allowing it be stolen from me without doing a damn thing.

Lose your ORLY. You don't how to use it.

[Neo-zero]

1)Holding a small amount of gold and will use this pullback to purchase more. 

2)Stored at home in my gun safe. Best way I can think of but I have less then a coffee mug full of semi-numismatic 1900's european gold coins.

3) I trade small amounts of options on GLD and SLV

4) no clue don't use one

5) purchase as much as you can off grid and/or buy coins with some premium from what I know it was only modern in circ US coinage that was confiscated

6) My personal gold is an insurance policy against the destruction of US fiat money, trade paper make mosney cash it in for Pysical.

7)  I also have 1oz silver and 50$ pre 1964 junk silver that I would use to make small transcations if I have to. I've never needed or wanted a bath bad enough to us a 1/4 oz gold coin for soap. 

Hope this helps

[SWRichmond]

Owing to the reasons you highlight, and many others, you will find few willing to provide details about their personal arrangements.  We are in territory here that is uncharted for most of us.  I will offer these general thoughts:

• If you are genuinely concerned about SHTF or EOTWAWKI, and you live in a big city, get out now.  Move to an "Open-Carry" state.  It is my sincerest hope that we don't "get there".
• Read all you can about the history of the Argentine currency collapse.  There is a wealth of very practical information available about this event, recorded in real time as it occurred.  The initial event is several years old so its progress can be seen over time.  Obviously, those who were best able to preserve capital fared the best.
• As for the risk of contract abrogation, the risk can be spread into several national systems.  If the financial situation of the U.S. government, for example, deteriorates severely, the measures they will try to impose will become more and more onerous.  The severity of this will depend on the severity of their situation.  Federal courts can be relied on to screw you if necessary; we learned this from GM and Chrysler.  Expect capital controls, expat wealth if you can.
• People have been hiding gold or burying it for thousands of years.  Use your imagination.  For example, many PM advocates report having bad experiences while traveling with their stashes on boats.
• I do not personally expect to do street-level transactions in physical gold or silver, unless Congressman Paul's new bill becomes law.
• A reserve currency shift does not mean TEOTWAWKI.  Argentina did not break down into Mad Max.

[WaterWings]

Excellent.

[Anonymous]

@Cursive

First, I do not really think of myself as a gold lover, but you asked some very good questions, so here you have my take:

I do not know the specific definition of your points a, b, and c are, but a) an unstable social environment is not why I buy gold. I think that paper will do fine as long as we are not talking downright civil war.

When b) Something hits the fan, implies to me another severe spout of instability in the international financial sector with bankruptcies and bank failures. That is to say a corporate crisis level. I buy gold because I do not want my savings to evaporate, if my bank fails, and because I do not really trust banks anymore. Now, many governments guarantee bank deposits, and I could diversify by holding to a number of bank accounts in different banks, so another approach is available, should I change my mind.

As for c.) the end of the world as we know it. I see that my statement above has been seen as a tad to gloomy, and maybe it is. To me, this is the multiple sovereign default scenario, where all backdoor diplomacy/extortion schemes would have failed, and where only outright offensive action of own national interest is left. In this scenario, there will be no strong governments to back the system, because the monetary system itself is breaking down, and I think that ultimately war is probable in this scenario.

I would buy gold, if I thought I would survive to see the other side of a situation like that. But I will probably sooner die of SHAME for having participated in the ignorance and complacency that allowed such ARROGANCE and CORRUPTION unfold in a way, that could (even if only remotely possible) lead to that outcome. Sorry, I just had to get that off my chest. I can almost not handle the supidity that goes around these days.

Anyway, I buy gold as a consequence of something between scenario b and c. I hope that the politicians will start to work together to transform the system no later than after b and definately before c. I think that gold will play a more prominent role in a new equity based monetary system, but I do not know exactly how - that is to say I am still reading, learning and forming my own opinion.

1.) I am holding physical only. I have considered some kind of inverse paper to hedge, because I think that a stock market plunge would tank gold at least short term as well. But I do not want to put my money, where my head cannot lead the way, and I am still struggling just to follow all this trading jargon, tickers and indices, so in short, I simply do not have a clue... yet - which is a pretty good reason to stay away.

2.) I use BullionVault and GoldMoney. They provide storage through professional vaults in Zurich, London and New York (BW only). I have not read anything bad about these two companies yet, but of course that leaves me with a different kind of counterparty risk. I like the concept, because they are private businesses for profit without safety net, which should motivate them to do their best. I store outside my home country, and they are decent with their external audit frequency. BW publishes daily reconciliations on the website on top of the audits. I think that with this concept my investment will be more liquid and more safe, than if stored at home. The storage cost is including insurance, and it isn't bad.

I actually see it as putting money in the "bank", only that the "bank" is not a bank.

3.) I do not trust the paper stuff for holding. Maybe for shorter term trading one day.

4.) Sure I am, but I have purchased a product as .999 fine, so the company would be liable, if they have sold me rubbish. Besides, I am confident that the physical gold establishment will be very keen on removing the bad eggs efficiently and quietly, because any further disturbance on that account, would probably ruin the entire business. Fine .999 Good Delivery Bars is a valuable trademark worth protecting, as I see it.

5.) I do not think that would be an option. They excel far to well in a different area of confiscation - Taxation.

6.) I sell part or all with the order facilities available, and transfer the money back to my bank account. I have sold a couple of times on days with rising or steady prices with no problems. It will obviously be harder to sell on a tank day, but thats the game.

7.) GoldMoney has a trading facility that allows you to pay for stuff against the value of your holding. I haven't explored this facility yet, but I think that this is actually the whole idea behind the company, where GoldMoney exchanges goldgrams against other available currencies to pay for e.g. soap.

I hope that this provided you with some of the answers you were looking for.

[Anonymous]

OT, but worth it
Evidence is mounting everywhere that there is a "Glorious Revolution II" taking place beyond your field of vision. Refocus... Film at eleven.

[Anonymous]

The really odd thing about Roubi's rant is that he's considered some sort of genius for "predicting the crisis". In fact he (very early) predicted "A" crisis not "THE" crisis. What did Roubi say for years would happen, before he focused so much on editing his own history and getting face time on CNN? He thought there would be a debt implosion brought on by a COLLAPE OF THE DOLLAR that would generate a rate spike. Guess what happens to the gold price during a greenback swoon?

SO has he changed tack completely or is he just pissed because he has been pretty much dead wrong about just about everything since March?

[waterdog]

I am sure all of us have watched the Antique Road Show. You have noticed that the appraiser never says- take this home and put in the safe, it is worth $50,000. The appraiser always says,- at auction, this item would bring $50,000. The reason he says at auction it would bring so many dollars is because if one never sells the item, then it is worth zero, or, only the emotional value one gets for having the item.

I have many paintings on the walls of my home. Most all of them are insured for replacement value. I pay a heavy premium for that insurance. These paintings have no value though. I will never sell them, ever. I get a lot of joy from looking at them. The insurance is a carrying cost I suppose.

Gold is the same. I have gold bars stored in a bank vault. These bars have no value. I will never sell them, ever. I use them for collateral against bank loans. The vault fee is a carrying cost I suppose. I have turned the same gold bars over more than a dozen times borrowing from the bank. I have borrowed at least 30 times more money than the bars could ever bring at sale. 

My point here is that gold is worth only what you sell it for. You must sell it to determine value. If one buys gold as an investment vehicle, then one gets into the type of squabbles that we read in this post today.

So, should a person buy gold or not? The question that must be answered first is, will one ever sell the gold that is being purchased?If the answer is no, buy it. If the answer is yes, wait until it becomes a good investment because it will only be worth what you sell it for.

[steve from virginia]

The traditional hedge against inflation in the US has been real estate. It can be had anywhere and everywhere and has 'always gone up'. Okay, we'll forget about that last part ...

Real estate is NOT a hedge anymore ... now what? No inflation, except in some asset markets where central bank liquidity and market manipulations are pushing up prices.

Gold ownership presumes that current economic difficulties are transitory and that the gold can be resold for currency sometime in the future at a profit. There is no other value- acquiring strategy to support gold ownership. The 'gold/can of baked beans' trade is not a good one.

Nobody alive today is old enough to recall the corrosive speculation in gold by banks and others during the early 1930's. Sovereign gold holders defaulted and abandoned gold. A large percentage of US banks failed. Gold speculation and  arbitrage emerges during crises where gold currencies have always failed. I can explain further, but the details are time consuming. You can certainly figure most of these out for yourselves.

Some consider gold to be an alternative form of currency against 'other, fiat' currencies. Willem Buiter points out in a fiat universe, all things including gold's putative value are fiat. Gold is not a currency. No citizen buys gold today to elevate the condition of his neighbors by circulating his gold to facilitate commerce in his town or city. Rather, he clutches his gold in his basement with one hand and a belt- fed weapon with the other with the intent of murdering his neighbors.

People become confused about credit and money creation. Finance creates credit denominated in currency. Central banks and treasuries create actual currency; the Fed creates dollars in open- market operations. Mr Bernanke is facilitating the laundering of illiquid dollar- denominated credit instruments into cash for his friends in finance. He and his partner- in- crime Mr Geithner are creating currency as fast as possible. Finance has many illiquid credit instruments; hundreds of trillion$ more of them than the Fed has available currency. Most credit instruments will never be converted; those 'in queue' are hoping against hope the current dollar slump lasts long enough so that they too ... can trade their worthless trash 'securities' for cash.

As a consequence of Bernanke's currency/securities trade, currency has vanished from circulation in large areas of the country. This is why the US is in a depression with millions of unemployed. In the real world, the effects of Bernanke's 'money printing' are negligible. See Steve Keen or another monetary economist for more nuggets of useful currency creation info.

There is physical gold and derivative gold or 'paper' gold which is the form most retail gold takes. There are numerous sites on the Internet pitching 'you buy and we hold' schemes. Since there are many more paper claims on gold than there is physical gold, the settlement of these claims will be done in currency. This is ironic; the gold basis has enjoyed an increase in value. The the paper claim against the metal may appreciate in value even more!

If your timing is good and you bought gold early enough, a paper gold trade might be a very good trade, indeed!

If the economy truly collapses, the paper claims will be repudiated. Gold purchasers will have neither gold metal nor currency. Suckers!

In the futures market there are also more long positions than physical gold for delivery. This implies a large short position held by the exchange itself and its banker(s) including Goldman Sachs. Uh oh ... If contract holders want to settle rather than roll over into new contracts, 'delivery' will be in currency not physical. This dollar/gold derivative trade is part of Bernanke's money laundering racket. The gold itself is meaningless, what matters is margin being converted to cash. It's a big reason gold prices have risen against the dollar, ditto stocks and bonds against the dollar. Don't fight the (crooked) Fed!

When the market turns and holders want to or have to sell to meet margin, there will only be one buyer ... Goldman- Sachs! Sorry 'bout your gold trade, bud! See Hunt brothers' silver corner for more info.

It is likely the Saudis and other Middle Eastern purchasers are behind the recent strong rise in gold prices. The Saudis have long bought physical gold. Since the Saudis have indicated they will hold crude oil prices below $85 they may be buying gold as they sell oil, transferring increases in the oil price above $80 to the metal. In other words, the dollar- debasement trade is shifted from dollar/oil to dollar/gold by arbitrage.

The outcome of this trade is to make the dollar a very hard 'petro- dollar'. Welcome to an extremely deflationary macro currency regime, gold bugs! You are getting right now all that you wish for! I hope you like the outcome, which will leave solid middle- class citizens and their families begging and camping out in cardboard boxes.

The Saudis flip Bernanke the bird; Saudia, not China, has the US economy by the balls.

I suspect this dollar hardening against oil is behind the rise in its value against other currencies. Keep in mind, a hard dollar still allows for a very high real price for oil; there is no escape from that! The hard dollar is starting the next deleveraging leg, which has been postponed since March by Bernanke's talking down (shitting all over) the dollar and pumping gold. That's right, the Fed has been boosting gold for its own reasons.

Saudi oil minister Ali al Naimi's intent to prevent a crash caused by oil prices rising to $100/barrel is instead causing a crash resulting from a very hard dollar. Welcome to the ironic universe, where all possible policy approaches have the same outcome.

(Except for one approach, which would work, guaranteed, but I won't go into it here ... :)

When the short- dollar trade unwind gains momentum it will be very hard for traders to exit their positions. I suspect the smart money is already on the sidelines. It would be smart to close short- dollar trades now. Consider that a market call. That includes gold.

Remember, there is no hedge against deflation ... zero hedge! Good luck!

[Cursive]

@ steve from virginia

I re-read the entire post twice, some parts 3 or 4 times.  This is easily one of the greatest explanations of our probable future (unless and until tanks start rolling in Eurasia).  Thank you for the detailed, lucid explanation.  I have had much the same view, but it is always good to read excellent writing.

[tip e. canoe]

that's deep shit baby.  

what i'm trying to figure out is how carbon credits work into the whole $/oil/gold relationship.

[Mr Shush]

I agree with much of what you have written. However, I have my doubts about certain points.

"Real estate is NOT a hedge anymore"

On the contrary, I believe that the right kind of real estate (farmland, or to a lesser extent just about any kind of rural property other than desert, permafrost or extreme mountainous terrain) is an excellent hedge against the outlier disaster scenarios. Even if it loses nominal value, that value will never go to zero. Unfortunately, it is illiquid, unfungible and would necessarily absolutely dwarf any and all other holdings in the portfolio of anyone who could even vaguely be described as an ordinary person. It is also probably not as cheap as it will at some point be, making it a suboptimal buy now (and potentially a very bad buy in the merely averagely bad scenarios, especially if purchased with leverage).

"The 'gold/can of baked beans' trade is not a good one."

No, it isn't. However, it is preferable to not being able to acquire food at all, which is a scenario posited for the dollar, pound, yen and quite possibly euro by some here, and not as implausibly as any sensible person would like. There is only so much food one can store, and one might at some point have a hankering for something other than beans, corned beef and Smash. Moreover, gold is prospectively exchangeable for higher value purchases, and portable in the quantities that would be required for same, not to mention capable of being moved in worthwhile quantities at short notice should one decide/be forced to flee the country. The killer investment strategy in the stagflationary depression but not armageddon scenario is probably to buy physical gold soonish, and trade it in for real estate at the bottom in a few years' time.

"It is likely the Saudis and other Middle Eastern purchasers are behind the recent strong rise in gold prices. The Saudis have long bought physical gold. Since the Saudis have indicated they will hold crude oil prices below $85 they may be buying gold as they sell oil, transferring increases in the oil price above $80 to the metal. In other words, the dollar- debasement trade is shifted from dollar/oil to dollar/gold by arbitrage.

The outcome of this trade is to make the dollar a very hard 'petro- dollar'."

I confess I both think this is untrue and find it hard to imagine how it could be otherwise. First, the price of gold is not primarily dictated (at present) by physical transactions, except insofar as large purchases of which the public are made aware, such as that recently made by India, are concerned. Second, if the Saudis are engaging in such a trade, then the gold purchases are irrelevant to the de facto petro-dollar pegging: the pegging would occur whether the dollars they acquire in return for their crude were invested in gold, or copper, or treasuries, or the Harare stock exchange, or their grandmothers' mattresses. China's yuan-dollar peg is not contingent on the use to which they put their dollars; why would the sheiks' be? Furthermore, the peg is not terribly durable: it is clear that it can survive neither a collapse in the dollar (because at some point it would become unaffordable to extract crude at that price) nor a collapse in global demand for oil (such as would presumably occur in a second great depression).

"Welcome to an extremely deflationary macro currency regime, gold bugs! You are getting right now all that you wish for! I hope you like the outcome, which will leave solid middle- class citizens and their families begging and camping out in cardboard boxes."

The currency regime is not the cause of the deflation. That would be the preposterous and unsustainable credit expansion of the years leading up to 2007. There is no policy solution that will have a good outcome in this scenario*. That ship has long since sailed. I know that some posters on this site exhibit happiness when they believe events are proving them right. It is not always easy to emote based on the larger and more general consequences of one's personal good fortune. I doubt very much, however, that many on these boards actually hope for a depression or worse. Life would be worse in such a scenario for anyone with enough humanity left to them for "living" to have any meaning, even if they did gain financially by it. Personally, as a wannabe theatre actor/director/writer with a low paid day job and a low 4-digit net worth, I think I can safely say I have no interest in such an outcome.

"The Saudis flip Bernanke the bird; Saudia, not China, has the US economy by the balls."

The Chinese have nukes and a vast army; the Saudis have neither. The US has realistic recourse against one of these countries if it believes they are actively harming its interests and cannot be persuaded to stop without force. Against the other, not so much.

*I think you make this point yourself towards the end of your post. I confess I sometimes get a little confused by smilies and the utterances they accompany, hence the uncertainty.

[Anonymous]

Steve,
very well written that...
but:
you mention "during the early 1930's. Sovereign gold holders defaulted and abandoned gold" but weren't those attempts akin to abandoning gravity?
(wasn't gold an "inconvenient truth", a straitjacket for policy-makers then & now?)
If gold is so irrelevant and so easily "abandoned" by Sovereigns why does it still EXIST as a store of wealth? (including the U.S. own substantial hoard)
How many attempts have been made on Gold's life by would be debasers over the centuries? Many, I'm sure. Yet it still occupies a central place in societies insecure and otherwise.
In zimbabwe we have the ultimate collapse scenario in which the able bodied, in order to survive, pan for the most minute quantities of, not Spam, but gold.
We had margin calls in Oct/Nov/'08 and gold was sold....how do you account for gold's rise since Steve? Goldman buying?
The Saudi theory is nice but so is the Japanese theory of arm wrestling the U.S. to get back "their" carry trade.

i guess i'm saying that there is just too much i disagree with, with what you've written.

[WaterWings]

Oh, wow. Where do I begin? Steve, since you can always sign up for a new avatar, and you bash 'goldbugs' with a strange, sick zeal, and acute/warped view of history, I'm going to take you to task.

Gold ownership presumes that current economic difficulties are transitory and that the gold can be resold for currency sometime in the future at a profit. There is no other value- acquiring strategy to support gold ownership. The 'gold/can of baked beans' trade is not a good one.

What the hell is that supposed to mean? If I can't sell my gold for a profit in a new worthless fiat currency then I'm an idiot? And you're going to have to explain your baked beans thingy a little better.

Gold speculation and  arbitrage emerges during crises where gold currencies have always failed. I can explain further, but the details are time consuming. You can certainly figure most of these out for yourselves.

No, please explain when non-debased gold standard currencies failed. I don't want to have to just figure it out for myself. I'll get off the soapbox in a moment so you can try again.

No citizen buys gold today to elevate the condition of his neighbors by circulating his gold to facilitate commerce in his town or city. Rather, he clutches his gold in his basement with one hand and a belt- fed weapon with the other with the intent of murdering his neighbors.

The Fed Res Note, which shamefully takes the name 'dollar', is the reason gold doesn't circulate as a liquid currency - not to mention that Congress has failed its constitutional responsibility [...to coin and regulate the value (weight and purity) thereof...]. The current fiat garbage we have as our 'currency', used to control, manipulate, and murder civilians worldwide, is the problem, not gold. Plus, you don't have to pay taxes on each FRN, unlike precious metals. 

Mr Bernanke is facilitating the laundering of illiquid dollar- denominated credit instruments into cash for his friends in finance. He and his partner- in- crime Mr Geithner are creating currency as fast as possible. Finance has many illiquid credit instruments; hundreds of trillion$ more of them than the Fed has available currency. Most credit instruments will never be converted; those 'in queue' are hoping against hope the current dollar slump lasts long enough so that they too ... can trade their worthless trash 'securities' for cash.

Here's a lucid moment, however - well done. But mostly because they were never meant to be converted. They know it is impossible considering the time frame.

In the real world, the effects of Bernanke's 'money printing' are negligible.

The stockmarket isn't negligible.

The the paper claim against the metal may appreciate in value even more!

Big surprise - that's what happens when paper isn't redeemable for something tangible anymore. Paper gold and tangible gold are not the same thing.

In the futures market there are also more long positions than physical gold for delivery. This implies a large short position held by the exchange itself and its banker(s) including Goldman Sachs. Uh oh ... If contract holders want to settle rather than roll over into new contracts, 'delivery' will be in currency not physical. This dollar/gold derivative trade is part of Bernanke's money laundering racket. The gold itself is meaningless, what matters is margin being converted to cash. It's a big reason gold prices have risen against the dollar, ditto stocks and bonds against the dollar. Don't fight the (crooked) Fed!

Agreed, the only reason you would want to be in paper gold at this stage of the game is to possibly skim some margins off here and there before the system starts to break beyond the point of ever being able to expect that dealers can, and will, actually send you gold instead of making you go through the legal process and demand it. If they don't want to deliver physical it's either because you're not a big enough client or they simply don't have it.

If the economy truly collapses, the paper claims will be repudiated. Gold purchasers will have neither gold metal nor currency. Suckers!

Again, I'm saddened to see you fail to imagine why people want physical gold. Look at the Zimbabwe situation as mentioned by another poster. Physical gold will always be desirable - even in Zimbabwe! They are converting mostly by barter into what they need to sustain their lives. Too bad they didn't have a case or two of baked beans before it all came crashing down. Now they have to go sit by a creek all day long.

The outcome of this trade is to make the dollar a very hard 'petro- dollar'. Welcome to an extremely deflationary macro currency regime, gold bugs! You are getting right now all that you wish for! I hope you like the outcome, which will leave solid middle- class citizens and their families begging and camping out in cardboard boxes.

Is that spittle on your computer monitor? Or are you just angry because you can't find any dealers that will send you physical gold anymore? Physical gold owners have gold because of what the Fed has done to our country, not because they want to see an economic crash. Only psychopaths truly want a crash - but most sane individuals can see it coming either way, by design. Waiting for this day of reckoning is not pleasant - goldbugs just don't like the idea of having to see their hard work, insight, and persistence go to those that chose to do the opposite. Again, only psychopaths want to see misery - but to deny history and not provide oneself with a short-term food solution in the event of major disruptions is foolish. 

I hope to not come across as mean, but when you make all these statements I will not hold back. You can't spread nonsense and get away with it. You did make some otherwise very interesting points.

[AngryVoter]

If you apply the same analysis to fiat currencies the argument is even more compelling than it is for gold.  Gold has been a currency for 6,000 years.  Fiat paper currency is much younger and has many historic realities of failing to hold any value at all.  If you think Gold is worthless how can you hold currency?  At least the supply of Gold is limited in the world of electronic banking fiat currencies are not even bound by the limits of paper printing anymore, but rather electron values stored on a magnetic disk.  To those that agree with rudummy (less than 1% of ZH readers) I'm not saying, I'm just saying, think about it.

[Sapan]

In todays world of global trade, gold will be an inadequate currency, we need fiat currencies to facilitate all our transactional needs. (just makes it easier to have few/larger denominations). Plastic money is further assisting in trade and transactions. We have spent hundred of years trying to improve our financial, monetary system to enable trade and exchange of good and services. We are never going to undo all the progress we have made and go back to gold. Yes the relative values of fiat currency against a benchmark gold (if u like it) may change but the systems of fiat currency is here to stay for long.

[AngryVoter]

I agree that fiat currency is here to stay but which fiat currencies will remain and what value they have is always in flux.  There are a lot of people who claim gold is not money yet USA the home of the dollar the world currency (as of this post) owns the most gold of any currency.  It is very hard to undo 6,000 years of history with 100's of years.  Even the world bank's SDR have a component of gold.  And in the most recent and most pressing test of fiat currency central banks are buying gold.  Why?  Because gold has the better than any other holding stood the test of time as a store of value.  At some point in the future gold may become nothing more than jewelry and a rarely used manufacturing metal but until then gold is money from a historic perspective and I would argue that is the best predictor of the near future. 

[delacroix]

why would central banks report the percentage of their reserves held in gold, unless that signified how much of their assets, were backed, by something, with universal value. I guarantee that if an amount of gold, is made available, for sale, there will be a buyer, at the current price. you don't have to discount the price to entice a buyer. every fiat currency ever printed, has failed, do you really think the dollar is different? it may take awhile, but the barbarous relic, is patient, after all, it's been around for quite some time.

[Sapan]

NR is making a point that gold should rise with inflation expectations which he does not believe will happen, to support his belief he shows decreasing velocity of M1, M2, M3. And hence he logically concludes that gold prices are correctly out of touch of fundamentals.

Where as Tyler argues with something about expectations that there will be inflation, to support his argument he expects he looks at history and expects that Fed will repeat its mistakes and fail again to control inflation. 

This is truly not apples to apples logical argument as one is saying what is the data telling in the present (NR's future expectations are economy still fucked and deflationary thus no inflation thus in the short-run, inflation hedge buying not true, hence bubble). While Tyler arguing with history rhymes and future will inflation, investors front running the inflation train. 

I think Tyler's argument is weak as he does not provide why will the Fed fuck up again, but he agrues the fed will fuck up (circular reasoning).

Reply what do u think.

[AngryVoter]

What I think is that banks central and private would love to remove any physical barriers to money creation what so ever.  This allows them (and not you) to print money ensuring they will always be able to ensure themselves the biggest piece of the world production pie not because of hard work or genius but because they have the prestige to print money.  FUCK THEM!

The reason gold has not kept pace with inflation is because of central banks and large banks collective efforts to manipulate the market and keep the price artificially low.  If you disagree how do you explain the vast over supply of fictional paper gold to real gold.  The reason that gold can go parabolic and not be overpriced is because for almost a century central banks have manipulated the price keeping it artificially low.  If that is the case then when the market finally overpowers the manipulaters (which on a long enough timeline always occurs) then gold will appreciate to it's natural level.  That momentum will naturally attract even more interest of the momentum algorithms pushing it to unsustainable levels.  $1,200 oz. is not unsustainable $8,000 oz. is.  Somewhere in between is the next top of the gold market.  The main risk is that the banks orchestrate a "madoff" in the gold etf market undermining the trust of gold investment funds.  This will torpedo 3rd party gold values but at the same time real gold held physically would probably more than double overnight to $20,000 oz. 

Reply what u think.

[THE DORK OF CORK]

I think it it safe to say that most readers of this site have a contrarian mindset.

We are now uncomfortable with the wider belief in gold as a store of wealth, I for one have tried to examine some flaws in my own anylasis.

I  an still of the opinion that gold will go ballistic some time.... but factors outside the market like future global capital controls ,capital gains tax etc. weigh heavily on my mind.

We need to remind ourselfs of the power of goverments to deny reality for a long long long time.

[delacroix]

we'll always be able to trick those stupid chinese, and arabs, to give us products, and oil, for chunks of shiny metal, they are such idiots, when will they learn?

[Anonymous]

Lead, brass and tin cans full of food.

Gold and silver are for optimists.

[Gordon Freeman]

Thought experiment:  if you had a kid starting college in 5 yrs, and you currently had $50K in a 529 for him, would you leave it in the market, or buy 50 oz. of gold for him/her, for the same purpose?  Personally, I bought him the gold...

[delacroix]

look into silver. at $10 oz several months ago, it was at an all time inflation adjusted low. hell it hit $50 when the hunts tried to corner the market, and dollars were worth more then , and there was more silver available. If it went anywhere near that price again,($10) you're stealing it for less than it costs to mine. and production is way down, and most forward production, is already spoken for, and russia/china, are keeping all of theirs.the market is tiny. the dollar has lost 10% of its purchasing power since then. coin shops charge $5 over spot for 1 oz coins, but good luck finding any.  college education, not like it was, when we were young.  community college, still a good investment.  student loan debt, not worth the degree.  big college= poor return on investment. my son is starting to realize this.

[Anonymous]

Look, you don't get rich off gold. It is meant to STORE VALUE.

Gold at 6000 will mean the price of everything has gone up, although everything may not go up equally, and stocks may fall or companies may fail in this process. Gold can't go bankrupt, or stop paying.

It has certain characteristics that have led to its perception the last 1000 years + as REAL WEALTH.

It is easily transportable. You could easily carry a year's worth of expenses hidden away on your person. Or hide it in the ground somewhere only you know (don't lose it now!)

It keeps its beauty. Copper, no. How long will gas keep? Of course it is smart to store food AND gold, that is a no-brainer, IMO.

It often takes more than a tonne of dirt in a gold-rich area just to find an ounce of gold! How much can this process really be simplified? Bottom line, it takes work and energy, for every ounce.

Unlike a one with infinite-1 zeroes on a computer screen.

[tip e. canoe]

"Look, you don't get rich off gold. It is meant to STORE VALUE."

this is the jist of FOFOA's argument yes?

[Anonymous]

John Paulson not withstanding(money managers don't tell you when they have bought what they are promoting),I think one piece is missing from Roubini's jiber jabber;and that is trust. Gold is going up not because of inflationary fears,and India and China are not buying it becuse of inflationary fears. They are buying it because they don't want to keep their excess dollars in TBs anymore(with close to zero interest in short term TBs,why risk your money in something that you don't know whether you gonna get back or not?and if the US decides to default,what are they going to do?declare war on the US?).So all in all,the one dimension to the defalation inflation debate that should be added is trust. And I don't thing that banx are going to succeed in their latest shock and awe to gold enthusiast. Just look at how many people are waiting for a drop bellow thousand to jumpm in.

[bugs_]

Chicks like gold.  End of gold argument.

[Anonymous]

chicks like dollars too.

signed

tiger woods

[Anonymous]

The word that everyone references, but few speak of directly is fungability. An assets value is intrinsicly captured in its fungability.

A gold-bug is advocating that hyper-inflation is an inevitable reality of the current money printing [quantitative easing] undertaken by central banks world wide.

Conversely, fiat enthusiats believe that the power of central banking allows for the direct manipulation of markets to create a desired outcome: the perception of stability in a mild inflationary environment.

What's to stop the government from passing a law confiscating all the gold held by private citizens? Does not the fungability of the fiat currency superscede the value of a gold bar when it becomes illegal to own?

Likewise, in the face of immediate disintegration of the taxing authority, who cares about pieces of paper with pretty ink printed on them ... a contract is a contract, and not all contracts are honored.

The escalating price of gold is in indication that the stability of the fiat currencies of the world are de-stabilizing. What happens to fiat currencies when people loose faith in them? They begin to write contracts based upon payment in another form, a commodity that cannot be directly manipulated. Gold may present a good trading opportunity ... but it cannot trump the intrinsic value of farmable land.

Most importantly then, is the relationship between real estate prices and the fiat currencies valuation of both gold and real estate.

[Anonymous]

"What's to stop the government from passing a law confiscating all the gold held by private citizens?"

we don't have a gold backed currency. Gold confiscation makes as much sense as confiscating people's Escalades or hot tubs...

[Argos]

Don't forget, most farm land isn't worth anything without oil.  Fertilizer, plows, etc.  No oil, no food.  When the farmer has to hook up the antique plow behind a couple of mules, then gold might buy you some grub.

[Anonymous]

it is funny to hear people say - WTF so and so knows about money? he is an academic.
It is like to say what math professor knows about math, he is a professor. It is the student that solves problems every night for his homework knows the math.
Stupidest argument. Being academic is not the same as being a janitor, quite the opposite. They guy has all the time in the world to study and to disect the fly thousand ways over. If anyone knows their stuff, it is the academic types. The rest are people with few tools they learned playing poker in smoke filled dorm rooms.

[Anonymous]

So is he an academic or retired professional money manager?

Wednesday, November 11

The Real Deal

An important and more specific follow-up paper to A Way Forward that we have presented twice... on paper and most recently at the Contrary Opinion Forum. Although we wrote it with a long-term objective in mind, it does seem to have a timely dimension. Each member of the team holds strong opinions on the markets and these opinions may diverge on individual assets classes today but converge on the unfolding of new economic history and the growing centrality of gold and the importance of the Dow/Au ratio in particular.

http://www.deanlebaron.com/The_Real_Deal_2009_1111.pdf

[sawyer]

For all the critics of Roubini here, you should know that he called last year financial crisis and the ensuing melt down of the markets more than a year before it happened. He specifically predicted the collapse of the shadow financial system (Investment banks). So what if he doesn't manage any money; many fund managers have done very poorly ver the past ten years (i.e. Leg Masson).