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A “Roubini Rebuttal” – Or: Why Most Economists Don’t Understand Gold!

June 21, 2013

It’s usually a mistake to think that an expert in one field is an expert in all fields.  In the latest instance of an economist wandering from his normal area of expertise, Professor Nouriel Roubini, the famed “Doctor Doom,” recently gave the world six reasons why he thinks gold will fall to $1,000 per ounce by 2015.

Here are his six reasons, in brief, and why we think he is all wet about a subject he doesn’t understand:

#1: “Gold spikes in times of serious economic, financial and geopolitical risks,” he says, and we are not in such a crisis for the time being.  True, but the world ALWAYS faces such risks.  Just because we are now “between crises” does not make gold a bad investment.  Will the world every really become “risk-free”?

#2: “Gold performs best in times of high inflationary risks,” but global inflation is now low.  True, the traditional measures of price inflation seem contained, but the mountains of newly-printed paper must go somewhere.  Lately, we’ve seen asset price inflation in the stock market, bond market and in real estate.

#3: “Gold provides no income.”  This old argument should be retired.  Gold is money.  It competes with paper currencies, not stocks, bonds or real estate.  There is virtually no income for short-term cash in the bank these days.   Gold is not a typical commodity.  It is the only commodity the world sees as money.

#4: “The Federal Reserve and other central banks are going to back out of quantitative easing” (QE).  That may be true, someday far in the future, but gold also rose during the years 2001 to 2008, before the Federal Reserve instituted its five-year run of quantitative easing and near-zero interest rate policies.

#5: “Many governments have high stocks of gold, which they may dump to cut debt.”  He cites Italy as a prime candidate, but why should governments throw away their “good” money (gold) when they have the comfortable option of printing more money?  Most nations have been buying gold while printing paper.

#6: “Political conservatives have hyped gold” as a hedge against “the government’s conspiracy to expropriate wealth.”  Not true, except for a small but vocal minority. You don’t have to believe in another “gold grab” by the federal government to believe that gold is a viable alternative to most paper money.

Roubini also echoed the late economist John Maynard Keynes when he called gold a “barbarous relic,” but gold has risen 67-fold since Keynes said those words in November, 1923, when Germany was being torn apart by a hyper-inflation.   Roubini also has a poor track record in gold price projections.  In November of 2009, he said “gold at $1500 is utter nonsense.”  (Gold actually hit $1900 two years later.)

Memo to Dr. Roubini: Most Central Banks are Still Buying Gold

Contrary to what Professor Roubini says, central banks are buying gold, not selling it.  Since the mid-April sell-off in gold prices, Casey Research cites this data about central bank purchases during May:

  • Russia bought 269,000 troy ounces last month.
  • Kazakhstan added 85,000 ounces.
  • The Republic of Azerbaijan bought 32,000 ounces. It was the fourth consecutive month of purchases by the former Soviet republic, which had no gold Reserves in December.
  • Turkey’s central bank bought 586,000 ounces.
  • Belarus and Greece also bought gold in April, though amounts have not yet been reported.
  • Altogether, the IMF says of those that have reported thus far, central banks bought almost a million ounces of gold last month. [Note: one million Troy ounces represents 31.1 metric tons.]

Casey adds: “If emerging-market countries raised their gold Reserves from the current average of 2.6% to 15%, it would require 17,359 tons of gold (558.1 million ounces)…. seven years of global production.”

Casey also cites a BullionStreet report, which says that “Ukraine has increased its gold Reserves sharply and is likely to surpass 36 tons by the end of May. In addition, the country is now embarking on a mission to launch large-scale gold mining. The gold mining operations will concentrate in the Western Ukraine and Kirovograd regions. According to BullionStreet, experts estimate Ukraine’s gold resources at 400 tons in the Carpathian Mountains and 500 tons in the Donbass region.”  The world is still seeking more gold!

Warren Buffett is Honest Enough to Admit He’s Ignorant About Gold.

Warren Buffett is a genius investor – in stocks.  He knows how to read a balance sheet and find value in companies.  But he admittedly doesn’t invest in what he doesn’t understand, and he doesn’t “dig” gold.

In May, 2013, after gold had taken a serious tumble in April, billionaire investor Warren Buffett said that he would not even buy gold “if it went to $800.”  Since gold doesn’t throw off “earnings” based on cash flow, Buffett doesn’t understand the unique value of gold.  But then, he doesn’t buy tech stocks, either.  He has said that he doesn’t understand the details of technology, so he avoids buying most tech stocks.

OK, fair enough.  But why try to knock those who understand an investment and have made good money at it, and slept well at night owning a commodity that represents a desirable alternative to paper money?

Buffett answers that gold has “never interested me….even when it was at $35.”  In his latest Berkshire Hathaway board meeting, he said that gold “just sits there, and you hope somebody pays you more for it.”  Not really.  Most gold investors are satisfied to hold gold with the hope that the price does not soar too far too fast, since that would represent a world full in crisis, hurting most of their other investments.

Buffett has been wrong about gold for over 40 years, ever since it was $35 per ounce.  Even with the recent price correction, gold is still up 40-fold (+3900%) at $1400 per ounce, performing far better than the Dow or S&P stock indexes, or bonds, or most other investment options during Mr. Buffett’s career.

Gold’s “Tug of War” (Paper Traders vs. Physical “Hoarders”) Continues

Gold’s price is stuck in a narrow trading range, something like a rope being held taut by two strong Tug of War teams.  In this case, the physical gold buyers – concentrated in Asia, but evident in every national market – are offsetting the sales of paper gold, mostly via exchange-traded funds and futures contracts.

Ironically, this Tug of War is being staged between the generally rich sellers in rich lands, vs. the mostly middle-class private buyers (and central banks) in poor lands that are rapidly growing richer, the so-called “emerging” markets.  In particular, three central banks in relatively poor Central Asia (Azerbaijan, Kazakhstan and Russia) increased their purchases of gold by 75% in April, according to the International Monetary Fund, while the richer central banks did not add to their gold holdings at these bargain prices.

In general, the Western (rich) sellers are “weak hands” (i.e., trend followers, traders, headline-watchers), while the Eastern Hemisphere buyers are long-term buy-and-hold investors who have finally accumulated enough capital to make a significant investment in gold.  While rich investors have unloaded 450 metric tons of paper gold so far this year, the massive amount of physical retail demand in Asia, Europe and among private investors in America is keeping today’s gold prices well above their mid-April lows.

The Tug of War continues.  If history is any guide, gold will eventually prevail over paper every time.