Why Roubini is wrong on gold

Dec 16, 2009, 11:58

Merryn Somerset Webb

Posted byMerryn Somerset Webb

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Bad news for gold bugs: Professor Nouriel Roubini, the man who, as the FT puts it, "came to fame for predicting the global crash in financial markets", still refers to gold as a "barbaric relic".

But even worse than that, he thinks our favourite metal is "in part a bubble that could easily go bust". I don't entirely disagree with him.

Almost everything is in a little bit of a bubble, simply because of the low-interest-rate/high-liquidity environment in which we live. And I never expect anything to move in a straight line – corrections are par for the course.

But I still believe that gold is in a long term bull market, one that is still a long way from its end, and one that isn't going "bust" any time soon.

Why? Because the supply and demand fundamentals are good. There is little new supply – mine supply has been falling on and off for years, and the central banks who used to regularly flood the market are now buyers rather than sellers. But there is plenty of new demand – both from those central bankers and from investors who, thanks to ETFs, now have an easy way into the market.

The key point here, however, is not that there is new demand for gold. It's why there is new demand for gold.

Roubini says that he can only see one scenario in which gold would "rapidly rise in value": one in which "fiat currencies are rapidly debased via inflation". Clearly, he doesn't think that is very likely (or he'd be a gold bug too). I think it's a dead cert. Not this year, maybe not even next year, but at some point before the crisis is fully played out. 

That's why I'm hanging on to my gold.

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  • 1. Stephen B

    (16 December 2009, 12:08PM)  Complain about this comment

    Whether gold should perform well because of inflation is difficult to ascertain; however, I think the perception of upcoming inflation tends to push up the yellow metal's price.
    Whether inflation will become established in 2010, I don't know. But I think there are more and more inflation-watchers out there, sensitised and aware to it not least through the blogosphere. This means any economic reports of rising inflation will stimulate gold to higher prices in 2010.

  • 2. Peter S.

    (16 December 2009, 02:04PM)  Complain about this comment

    Roubini's reputation is being staked on his stance that gold is and always has been a "barbaric relic." (with little or no apologies to Lord Keynes). If gold performs like we believe it will (stairs tep increases, with some corrections along the way), but nonetheless a long term bull market in commodities in general and gold and silver in particular, then Professor Roubini will have a large amount of crow meat to consume.

  • 3. Martin

    (16 December 2009, 10:13PM)  Complain about this comment

    Currencies have already been debased by inflation, we just don't have major price inflation yet. All we need is a currency event. When it is perceived that the Fed is buying all our debt with conjured out of nothing dollars, the dollar (and other currencies) could fall overnight, and there would be an instantaneous flight to gold.

  • 4. Jed

    (17 December 2009, 12:45AM)  Complain about this comment

    Lets see, massive debt, government doctored numbers, printing massive amounts of money, more government spending, continued government growth, Governments and States ready to default, creative accounting by the banks. Trillion dollar wars.
    No, gold is not the place to be?????

  • 5. Tony O' Grady

    (17 December 2009, 03:08PM)  Complain about this comment

    Marc Faber reckons gold will never drop below $1000 again. Don't know whether I agree entirely, but he is no slouch!

  • 6. j barrows

    (18 December 2009, 10:41PM)  Complain about this comment

    Gold would be a barbarous relic if only central banks would maintain the integrity of fiat currencies, but they plainly are not. Gold is the ultimate currency as it cannot be debased like fiat currencies. QE and 0% interest rates are now setting the scene for the next blow up. There will be only one way that the vast debt mountains being accumulated by governments will be 'sorted' out and that is through inflation caused by devaluation of currencies. Holding gold is very rational.

  • 7. speed7791

    (22 December 2009, 02:03AM)  Complain about this comment

    Give it a little time. We are returning to the gold standard. The wheels are already in motion Governments and economists take people on the main street for fools. Let there be no doubt that gold will shine its brightest at the end, but SILVER WILL BE THE TRADE OF THE DECADE. Currencies on the other hand are on the way to their intrinsic value.

  • 8. gazkaz

    (28 January 2010, 12:58AM)  Complain about this comment

    Pleeeeeeeeeeeeease, take it as read that what you hear and read is coming from "the same song sheet".
    Now stop and think -
    The US debt doubled in 12m and is inceasing at $100 BILLION dollars a month - now "before" that happened top Fed officials publicly said before televised congressional questioning, & I emphasise BEFORE, "The worlds financial system would have collapsed if we hadn't intervened". Then they issued lots of rubber cheques !!
    Next - if Japans Treasury rates need to nudge up a couple of % -it will have to default on its sovereign debt.
    So as not to labour the point - move to china - everyone can have an empty skyscraper - growth is ........ what ? 8/9% for the 100th quarter running.
    Then think G-L- & not the fuzzy wuzzy etf/paper derivative stuff either - OR just stay with the "you can fool ......" crowd.

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