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.Let's pull this conclusion apart piece by piece.
By calling gold a "barbarous relic", Roubini is simply exposing his unsophisticated Keynesian roots. Since it was Keynes who coined the term in his work Monetary Reform (1924), p. 172. Of course, Keynes was probably joking and Roubini has missed the joke. Keynes made a fortune in gold stocks in the 1930s after loading up on the stocks and then advising FDR to prop up the gold price. In a way the elite are more fascinated with gold than anyone.
It is quite amazing for Roubini to refer to getting "stuck" with the "barbarous relic", since it has been one of the best performing assets since the turn of the century. May you get "stuck" with such returns.
Roubini goes on:
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.Now, Roubini has to be joking here. What asset hasn't had wild swings in this crisis period? Further, who cares about wild swings when at the end of the quarter gold is up? As for it having no intrinsic value, he sounds like my taxi cab driver.
Then, Roubini calls gold a "fiat currency". Does he even know what the word, fiat, means. Hey, Nouriel, it means "by decree", as in, "by government decree". Gold is the anti-fiat money. Governments would love to destroy it and replace it, forever, with the fiat paper they print.
Naturally, we also get the infamous Roubini hedges that take the opposite position of his main position:
an insurance policy against the tail risk of eventual inflation, it may be useful to hold a small amount of gold in one’s portfolioBottom line: Here's what is really going down with gold. Bernanke is not printing any money. He hasn't since February 2009. Thus, there are fewer dollars chasing all assets, including gold. Gold will drop in price. This is likely only temporary (But the drop could easily get down to $800, Maybe $600). At some point the Fed will start printing again because of A. The second dip of the double dip downturn we are in and B. the tremendous new debt the Treasury will be issuing in coming years, which the Fed will start buying up, to prop up a Treasury bond market that would otherwise look worse than Greece's bond market right now.
When all this happens, Roubini will know full well, just like my cabbie, why gold is a preferred inflation hedge versus spam.
I'm still not sold on your explanation of why gold should fall in value since the Fed hasn't necessarily printed money since February. What about the liquidity that the banks are still sitting on?
ReplyDeleteUh, there sitting on it.
ReplyDeleteWell, what happens when they start lending it out? What happens if they start lending out those loans before Bernanke starts printing again?
ReplyDeleteDo you basically believe that the banks won't be loaning out any of those reserves until the Fed starts printing again, or that the banks will never loan out those reserves? And that neither of those scenarios will occur until gold hits $600-$800?
Perhaps you've addressed these questions before, in which case I apologize. I'm fairly new to this blog (I really enjoy it, by the way), so if you have addressed these points before, I would appreciate it if you could point it out to me.
If they started to loan that money out, it would be a different situation.
ReplyDeleteIf that money started to hit the system and Bernanke didn't drain elsewhere, it would be highly inflationary and I would change my short-term bearish view on gold.
It's just that there are so many what if's that you can't trade on them. It's tough enough to trade on what is actually going on in the markets. Fortunately, there is usually a lag between what happens to money supply and what happens in the markets, so there is time to react and change positions.
In addition, I see the economy deteriorating, again, at this point so it appears to me unlikely there will be a significant move out of deposits with the Fed.
Thanks for the question. It's an important one.
Does gold really have intrinsic value?
ReplyDeletehttp://www.lewrockwell.com/north/north772.html
@anonymous
ReplyDeleteWhere do I say gold has intrinsic value?
I quote Roubini dismissing gold becaue it doesn't have "intrinsic" value, but I then link to my taxi cab story where I relate how gold has "exchange value", versus the view of my cabbie who implies that gold has no intrinsic value and therefore dismisses it, when he fails to understand exchange value.