Guest Post: Roubini Attacks The Gold Bugs

Tyler Durden's picture

Submitted by Detlev Schlichter of DetlevSchlichter.com,

Earlier this month, in an article for “Project Syndicate” famous American economist Nouriel Roubini joined the chorus of those who declare that the multi-year run up in the gold price was just an almighty bubble, that that bubble has now popped and that it will continue to deflate. Gold is now in a bear market, a multi-year bear market, and Roubini gives six reasons (he himself helpfully counts them down for us) for why gold is a bad investment. Roubini does not quite go so far as to tell his readers that there is no role whatsoever for the yellow metal. Investors should have a “very modest” share of gold in their portfolios, as a hedge against extreme risks, which, the good professor assures us, are almost so negligibly small that they are “irrational fears”, really, but beyond that there is little reason to bother with gold.

Interestingly, “very modest” is indeed a good description of gold’s share in the global asset mix. According to some studies gold accounts for only around 1 percent of global asset holdings. In terms of asset breakdown we already are where Roubini thinks we should be. So why bother? Those of us – such as yours truly – who hold a more pessimistic outlook as to the efficiency of current policies and the sustainability of the current monetary infrastructure, and who accordingly hold a bigger share of their wealth in gold, are evidently “paranoid”, and as they now reap the deserved reward for their dreadful negativity courtesy of a declining gold price, why not ignore them? It is, after all, a tiny minority. But it is evident from Roubini’s essay that he not only considers the gold bugs to be wrong and foolish, they also annoy him profoundly. They anger him. Why? – Because he thinks they also have a “political agenda”. Gold bugs are destructive. They are misguided and even dangerous people.

Roubini’s case against gold

But let’s first look at his arguments for a continued bear market in gold. They range, in my view, from the indisputably accurate to the questionable and contradictory to the simply false and outright bizarre. Here is the list (with some of my commentary. Apologies to Professor Roubini.):

1)   Gold is only useful in extreme economic scenarios (such as 2008/2009) but even then its price is highly volatile (and so it was in 2008/2009).

2)   Gold is only useful when there is risk of rising inflation. Despite unprecedented policy measures, such as multiple rounds of QE, there is no inflation, according to Roubini. – Why is there no inflation?- Because the newly created money is stuck in the banking system and the wider financial system where it finances a happy merry-go round of asset trading without boosting broader monetary aggregates. Outside finance (and government, I might add) nobody wants to take on more debt. The normal transmission mechanism is not working. – Additionally, Roubini makes some heroic assumptions about there being no pricing power and no wage inflation.

3)   Gold produces no running income and will thus be at a disadvantage in a recovering economy when equities and bonds do better. – Wait a minute. Recovering economy? Where did that come from? I thought none of the monetary stimulus was getting through to the real economy and hence failed to ignite inflationary pressures? How can it then stimulate real activity? Or are the two somehow unrelated?

4)   Gold does best when interest rates are low or negative but the present recovery – recovery, again! – will allow central banks to unwind their present easy monetary policy stance and to hike interest rates. –- OK. Good luck with that. But again we are asked to take the present talk of recovery at face value. On the one hand Roubini cites ubiquitous deleveraging pressures, “lack of pricing power” and “excess capacity” (these are his words!) as reasons for why the extraordinary expansion in base money supply is not translating into money growth in the wider aggregates that usually drive the wider economy, and why therefore standard inflation measures remain benign and, on the other hand, evidently sees none of this as an obstacle to the self-sustained recovery story. — And if the economy indeed does recover without the help from easy money then, maybe, monetary policy is easy for other reasons, such as keeping an overstretched banking system from collapsing. In that case, better growth momentum as such may not be sufficient to allow central bankers to exit their present policy program.

5)   Fears of sovereign default have been driving people into gold but now the greater risk is that struggling sovereigns may sell their gold holdings. – This is potentially a risk but I would counter that while selling from official sources could affect the gold market in the short-term, liquidating the family silver (no pun intended!) and removing the remaining smidgeons of hard assets at the bottom of the inverted pyramid of the über-leveraged paper money economy and replacing it with government IOUs is not going to instil a lot of confidence on the part of the public. Gold liquidation is a further sign of stress, of a check-mated policy elite running out of options, and the public may end up scooping up willingly whatever desperate politicians sell. But I guess that reasonable people can disagree on this point. – But now it gets really interesting:

6)   In large parts the gold bull market was the work of, wait for this, “extreme” political conservatives, of the “far-right fringe” and conspiracy theorists. That hype is now coming undone. According to Roubini gold is not simply another asset but an indicator of political extremism, of an unhealthy mistrust of the established order. Roubini: “These fanatics also believe that a return to the gold standard is inevitable as hyperinflation ensues from central banks’ ‘debasement’ of paper money.” – Well, I guess it is time for the IRS to conduct a couple of customized tax audits!

Monetary policy prevents economic healing

Roubini does not provide much explanation for his claim that we are now in a self-sustained recovery that will allow central bankers to exit the extreme policy positions they adopted in recent years. He seems to rely on the healing forces of the market. I am the first to agree that these forces do exist in a capitalist economy and that they are incredibly powerful. That is why the market should always be left to its own devices, be allowed to unwind and liquidate accumulated dislocations that are now barriers to renewed growth, and to bring the economy back into balance. But these are precisely the very processes that present monetary policy sabotages with all its might: zero interest rates and unlimited bank funding, plus ongoing asset price manipulations, numb the market’s power to cleanse and heal and re-adjust, and instead allow banks and other financial operators to continue in their policy of pretend and extend, to keep on their books underperforming, bad or even toxic assets at unrealistic prices.

Policy makers have to decide whether they want the market to operate its healing powers (even if some of the healing imposes near-term pain on the patient), or whether they rather trust they own powers to continuously drive the economy, imbalances and all, to higher levels of performance with their money-printing, market manipulation and deficit spending. We know which path they have followed so far, and that is why placing your hope on self-healing market forces is naïve. Strangely, Roubini himself has on numerous occasions warned against a strategy of kicking the can down the road and has repeatedly warned of new credit bubbles. I wonder which Roubini wrote this article.

At the core of Roubini’s argument is a paradox: Easy money – the monetary ‘stimulus’ – is stuck in the banking industry and the wider financial system, and that is his explanation – together with excess capacity, deleveraging and the absence of ‘pricing power’ – for why the standard measures of inflation – consumer price inflation in particular – have not risen more dramatically. Unless you are a derivatives trader or a hedge fund manager you have not seen any of the money. But when you will, finally, believe me, then the prices that matter to you will also go up. Roubini cannot have it both ways: easy money has no effect on inflation but a stimulating one on growth – not even his funny New Keynesianism can square that circle.

But the real criticism of present policies is not that they will lead to instant hyperinflation – I believe they will eventually lead to much higher inflation and probably hyperinflation – but that they don’t solve anything but make economic imbalances much worse. They do not have an exit, and this is why they will ultimately destroy money. Roubini is overstating the ‘healing’ argument considerably, and in the course makes some big blunders: “Ongoing private and public debt deleveraging has kept global demand growth below that of supply.” – This is evidently not supported by the facts. As I have argued before, private sector deleveraging is minor, and in most countries, governments are issuing massive amounts of new debt, certainly in the US, the UK (contrary to what the public debate there would make you believe), and Japan.

Are owners of gold ‘extremists’?

But what is most worrying, and most disturbing, is Roubini’s pathetic attempt to label gold bugs political extremists. Central banks run policies today that only a few years ago would have set the average middle-of-the-road central banker’s hair on fire. Of course, the public is worried, scared and skeptical. Because the political and monetary elite, the establishment of which Roubini – senior economist for the Council of Economic Advisors under Bill Clinton and senior economic advisor to Timothy Geithner when at the United States Treasury Department – is a member, has lost the plot. The paper money bureaucracy has painted itself into a corner. The public has very good reasons to be worried, skeptical and scared.

Early in his article, Roubini makes the following observation: “During the global financial crisis, even the safety of bank deposits and government bonds was in doubt for some investors.”[my emphasis.] – What does he mean, for some investors? Banks did fail and governments did go bankrupt in the crisis. Was that just a figment of the imagination of some investors? – The only reason that not more banks went under (yet) and more governments went bankrupt is unlimited money printing. Unless monetary policy changes meaningfully we won’t even know which entities are truly solvent and which are not. And then we might find out the hard way.

Of course, people who are already predisposed to skepticism towards the political elite and their ongoing meddling with the free market will be more inclined to buy gold. But that only makes them libertarians, or individualists, or simply people who are suspicious of power and politics. I have met many of them and have yet to meet anyone who deserves the label ‘far right’, with all the connotations that Roubini invokes here, deliberately, I assume. — I am the first to acknowledge that the pro-gold community – and it is not even a real community – has its fair share of eccentrics but the majority of those who piled into gold is simply worried about where our unhinged monetary system will take us next – and justifiably so.

Roubini simply resorts to smear tactics. The same approach has been shamelessly employed for many years by Paul Krugman. The idea is to unilaterally determine the acceptable parameters of enlightened economic debate. The high gospel of John Maynard Keynes is not to be questioned, and the wisdom of having highly-trained academicians running a central bureaucracy in charge of monetary policy, administratively setting interest rates, creating bank reserves at will, and manipulating the prices of a growing number of assets to the benefit of the greater good, a system that not only did not exist 50 years ago but that back then nobody even advocated, is not to be challenged under any circumstances. Those who do are not worthy of debate. They are evidently members of the Montana Militia. They are crackpots and dangerous subversives. As Roubini stated: Advocates of a gold standard are fanatics.

This is, of course, utter gibberish. A well-articulated, rational and sophisticated theory exists for why paper money systems are unstable and why they fail, and why hard money systems work better. The Austrian School of Economics explains this convincingly. Its leading intellectual light was Ludwig von Mises (1881 – 1973) – urbane, sophisticated, highly intelligent, and a man of principle, one of the greatest economists of the twentieth century, who lived and taught in Vienna, Geneva and New York. – Not your average backwoodsman.

Roubini may be right on one thing: maybe gold will go down to $1,000. So what? – It won’t stay there. For whatever happens next to the gold price, or for whatever the Fed does next, Roubini’s overly geared paper money economy will not survive in its present form.

In the meantime, good luck with that ‘exit strategy’!

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One And Only's picture

What a cunty fucking fuck.

Fucking economists.

kliguy38's picture

stop giving cunty fucks a bad name

Zer0head's picture

Roubini, Larry Summers

separated at birth and reunited when Nouriel needed some backers for RGE

http://graphics8.nytimes.com/packages/pdf/politics/20090403whitehousefor...

 

and Roubi partying hard http://i.imgur.com/E2zeZLN.jpg?1?9749

Pladizow's picture

Easy, what was the outcome of his 2009 gold forecast?

http://www.businessinsider.com/roubini-gold-has-topped-2009-6

NOOBini needs to STFU!

SafelyGraze's picture

"struggling sovereigns may sell their gold holdings."

talk to the crown(s):

http://en.wikipedia.org/wiki/List_of_royal_crowns

the goldfoil-hat crowd .. they believe crazy stuff like -- my extended inter-marrying tyrranical family that formerly ruled the world will one day soon rule it again

imaginalis's picture

He sounds shit scared of gold

hit_the_bid's picture

well he needs to download this then if he ever finds himself short of that other scarce resource, which can easily double as fiat money.

http://www.guardian.co.uk/world/2013/jun/09/phone-app-venezuela-supermar...

 

why is there no TP index/futures?

markettime's picture

Over a quadrillion $$$ worth of deravitives would agree. 

GetZeeGold's picture

 

 

Only a quadrillion......what the hell could possibly go wrong?

Anasteus's picture

Exactly, Roubini has just demonstrably proven how dangerous gold is for the central manipulators and how potentially valuable gold is. They must be damn nervous if he so offensively resorted to label goldbugs as being extremists. No wonder, physical gold reserves go rapidly down despite massive propaganda and price manipulation, which strongly limits the continuation of the farce. Once the last ounce of German gold will be withdrawn from the JPM vaults, the game is over. Well, once argumentation is lacking, offensive speech and intimidation start taking place; nothing new. Nevertheless, I would strongly recommend Nouriel Roubini finding out who really caused the problems and not to confuse cause with consequence.

However, it's interesting he didn't mention Asia and overall Eastern buys whatsoever, where, in fact, far the biggest part of the stuff is outflowing. Compared to that Western buys are almost negligible, yet Roubini addresses the message solely to the Westerners. This indicates how he, as well as the whole establishment and the FED, are scared of gold sentiment change that could penetrate the Western mind from the East. That's why the manipulation is so desperately intensive these days; they have to smash down the sentiment at all costs. They rather prefer to hand over all reserves to Asia to risk the gold perception paradigm shift. But I think it's already too late. After all, it's virtually irrelevant whether all gold reserves will be repatriated to the East with or without a little help from Western buys; it just postpones a bit the date when physical gold becomes generally unavailable. I think, a clear message to all dear gold&silver bugs.

Doubleguns's picture

3 billion chinese right wing gold buying extremists would disagree with Roubini. 

Panafrican Funktron Robot's picture

It is interesting to me that even "gold agnostics" like Harry Browne (who allocated a mere 25% of his portfolion in gold) would probably fit Roubini's definition of "extremist".  I wonder if Roubini would accept even the concept of gold as a currency hedge, which any investor worth their salt always does 100% of the time.  

Manthong's picture

!!!

Some might NOT not understand ..

LARRY SUMMERS DECLARED GOLD RESERVES TO BE  A DETERMINATOR OF INTEREST RATES MANY YEARS AGO..

DO SOME RESEARCH.

BUT ok, The party thing was cool to us "open minded" types.

chubbar's picture

google "gibson's paradox" for that research paper he co-authored.

Crisismode's picture

 

 

Rou == bee == nee

was made famous for one call, and one call alone.

That was 5 years ago.

He has missed 14 out of his last 16 calls since then.

Why is anyone paying any attention at all to this pissant???

 

Jack's Digestible Ideas's picture

"Of course, the public is worried, scared and skeptical."

 

"Of course, the public is ignorant, docile, and obedient."

 

fixt

DoChenRollingBearing's picture

Crisismode

 

Quite right.

Ahh, Roubini...  ZZzzzz.  Roll me over in an hour or two...

ali-ali-al-qomfri's picture

Oh DCRB, "ZZZZZZZZZZZZZZ" is the sound a gold bug makes, sleeping at night, calm and peaceful.

TheGardener's picture

Gold extremist are into how many grains make an ounce.

No charts, no charters, no rules.

logicalman's picture

I think it's the paper guys that are the extremists, or they wouldn't be shouting so loud.

 

DeadFred's picture

This is an extremely important post. When someone is lying to you and you know that he knows he's lying, grab your wallet, he's trying to scam you. Such an absurd thesis from an intelligent human being means he's desperate to get you to sell gold.

This is a highly bullish contrarian signal.

caconhma's picture

Born

Istanbul, Turkey

Institution

NewYork University

Alma mater

Harvard University (Ph.D. 1988)

Influenced

-         John Maynard Keynes

-         Larry Summers

-         Jeffrey Sachs

 

Shall I say more?

 

lewy14's picture

Roubini's student, Brad Setser, blogged for some time prior to joining the Obama administration. He co-authored some of the papers that "called" the crisis. Unlike his mentor, he had the intellectual honesty to review those papers and enumerate what they got right, and what they got wrong. (Look back at the archives at the link above).

What they got wrong is that they assumed the 'orrible 'orrible deficits of the Bush era would cause a run on the Treasury market and the Dollar. Obviously that's not how the crisis played out.

But the Obama deficits are OK. It's all good. Just a bunch of doomers and baggers screeching about nothing. Likely racist. 

The Financial Times in general and Izabella Kaminska in particular have been leading the political demonization of gold. It has become akin to the opinion that immigration ought to be limited: it labels one as a "dangerous far right extremist".

Non Passaran's picture

You're right on Aphaville. I rarely go to that blog now because of her ridiculous anti-gold crusade.

hit_the_bid's picture

well they were all in on the pro euro spiel, so they have form. consistent at least.

SnobGobbler's picture

we're talkin' pussy right? cause nouriel IS certainly the name of a hard-core pussy! 

just like hillary is a boys name..pussies...all of-em.

flacon's picture

Gold/Silver is the only commodity with no known price. And don't tell me that $1,383 is the price of gold. Pffft. Do you think that people are going to be buying GLD to hedge against financial Armageddon?

Long-John-Silver's picture

Paper Gold and Silver going to ZERO while Physical Gold and Silver is going to infinity in USD.

RafterManFMJ's picture

I'm sick and tired of people buying, and hoarding mud! Mud is a relic of an ancient, filthy people! Mud is no good! Etc.

See, I don't get if gold is such a barbaric waste, and the people who buy it hopeless nutjobs, why all the complaining?

Why all the virulent attacks?

Seems to me the lady doth protesteth too much.

Herd Redirection Committee's picture

Just like when 'climate skeptics' are attacked.  Their arguments aren't addressed, the facts aren't addressed, no dialogue is started.  Instead, you get ad hominem attacks from 'authority figures'.

Yep, thats enough to convince me to sell my gold /sarc

James_Cole's picture

Just like when 'climate skeptics' are attacked.  Their arguments aren't addressed, the facts aren't addressed, no dialogue is started.  

Facts? By facts I take it you mean comical levels of ignorance? 

Panafrican Funktron Robot's picture

"Facts? By facts I take it you mean comical levels of ignorance?"

By you, yes.  Pretty simple.  Compare the data on increases in CO2 into the atmosphere, vs. the change in temperature.  I take it by being here that you are familiar with the basics of charts and correlation.  Tell me if you think the correlation is weak or strong.  

Hammurabi's picture

yes, I remember when Roubini was telling his fans in december 2008 to sell the stocks they have because the Dow is going to zero in the next year. or he is a hypocrite or donkey

DosZap's picture

 Roubini’s pathetic attempt to label gold bugs political extremists.

That settles it he is a .gobers shill.What is a gold bug?, anyone who diversifies their portfolio's(as suggested for many years),as a hedge is a political extremists?.

I think he falls into the same pan with Krugman.

slimething's picture

"I was for gold before I was against it"

Racer's picture

Two thousand year old gold artifacts have great value and gold is only made in a sun

The dollar is made of paper, errr toilet paper, printed by maniacle key pressers

I rest my arse on the case err toilet bowl

Bay of Pigs's picture

Not sure who Detlev Schlichter is, but one thing is certain, Nouriel Roubini is a spectacular assclown on gold.

FreedomGuy's picture

There are two classes of gold buyers. First are the investors. They get in and out like anyone buying and selling commodities. The second class and seemingly more numerous here are what I call the insurers. We buy gold as insurance against government, central planner, central banker arrogance and stupidity. Making fun of this class of gold bug is like making fun of someone with car insurance or home insurance before the disaster hits.

Keep laughing and pray for unending good luck.

hit_the_bid's picture

poor analogy, insurance industry prey on ppls fears to sell insurance........whereas i think most ppl who buy gold need no forceful persuasion, they have worked it out for themselves that gold is a decent hedge against what prob willl happen.

 

nmewn's picture

Dr. Doom Tries On Krugman's Tutu.

Wakanda's picture

It's not pretty and neither one can dance.

nmewn's picture

But fat ass Nouriel ripped it, so, Krugman still has the whole Broken Window fallacy thingy going for him...lol.

Wakanda's picture

We've gone from not pretty to pretty ugly.  : - P