Courtesy of Mish.
I just finished reading Nouriel Roubini’s seven point analysis on the Bursting of the Gold Bubble in which Roubini’s asks and answer the question “Gold skyrocketed to over $1,900 per ounce in the fall of 2011 from $800 in early 2009, but has since collapsed by around 27%. Why?”
I offer a point-by-point rebuttal.
Roubini: First, tail risks are lower. Gold tends to spike when the global economy faces severe economic, financial and geopolitical threats; but, thanks to a variety of policy actions, the tail-risks argument for holding gold is less compelling today than at any time since the start of the financial crisis in 2007.
Mish: Japan is flirting with a Yen crisis thanks to Abenomics. Nothing has been fixed in regards to structural problems in the eurozone. A US recession is at hand. A China slowdown is baked in the cake. Trade wars loom between China and Europe. A full scale housing bust is underway in Australia. The UK threatens to leave the EU. The eurozone is unlikely to survive in its current state. Tail risks are enormous (and growing). I would have thought tail risks were so obvious that any serious economist would notice them. I was mistaken.
Roubini: Second, inflation is low and falling. Gold does best when there is a risk of high inflation, as it is a traditional store of value against inflation. But, despite the very aggressive monetary and quantitative easing from many central banks, global inflation is actually low and still falling as growth in most of the global economy remains below trend.
Mish: Gold actually does well in periods of deflation, in periods of credit risk, in periods of stagflation, and in periods of hyperinflation (the latter is obvious). Price inflation fell from 2000 to 2013 and gold rose from $250 to $1900. When was there risk of high inflation in that time-frame?
To be fair, one also needs to look at the disinflationary period between 1980 and 2000 when the price of gold collapsed from $850 to $250. Yet, in disinflationary periods in the last decade, gold soared. The difference? Credit risk and global distrust of fiat currencies. It’s easy to cherry pick a timeframe and say gold does this or that, when other timeframes and other factors disprove the thesis.
Roubini: Third, other assets provide better returns. Now that the global economy is recovering, other assets, such as equities or even real estate, are performing much better than gold.
Mish: Lovely! The same sort of argument regarding housing could have been presented in 2002, in 2003, in 2004, and in 2005. Yes, other assets are performing better, for now. But for how long? Is the current trend supposed to last forever? Has Roubini suddenly become a momentum trader in what is performing best?
Roubini: Fourth, exit from ZIRP will be bearish for gold. Real interest rates and gold prices are highly inversely correlated. Although real rates are still negative, the more positive outlook for the U.S. and global economy implies that the Fed and other central banks will gradually exit from QE and ZIRP. Real rates will rise over time rather than fall.
Mish: Precisely when is the Fed supposed to end ZIRP? Tomorrow? Next Month? Next year? A decade? If “real rates rise” won’t that be a sign of increasing inflation? Is increasing inflation good for gold or not? Roubini attempts to make a case that rising inflation and falling inflation are both bad for gold and both are about to happen simultaneously. Let me also point out that Roubini thinks ‘QE’ won’t end for another two years! He can’t have it both ways.
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