Why I Disagree with Nouriel Roubini

by JDH on June 8, 2013

On June 1, 2013 Nouriel Roubini, a professor at NYU’s Stern School of Business and an often-quoted economic expert published an article entitled After the Gold Rush where he makes the case that the gold “bubble has burst”, and he believes that “gold prices are likely to move towards $1,000 by 2015.”  He gives six reasons for his opinion, which I paraphrase below, with my comments:

1 Gold prices spike in financial crises, but they fell sharply in 2008 and 2009, so even a crisis may not increase the price of gold.

That’s true, but the price of gold today is much higher than it was before, during and after the crisis of 2008 and 2009.

2 Gold performs best when there is a risk of inflation, but inflation is dropping as banks hoard the liquidity produced by government money printing.

True, but do we honestly believe that the government can keep the fire hose open at full power forever without ever creating inflation?  I don’t.  There may not be inflation evident today, but it is inevitable.  I could also make the argument that there is inflation in basic goods like food, but I don’t have the data to prove my point.  You can prove it for yourself by comparing your food bill from this year to past years.

3 Gold doesn’t provide income.

True, but neither does a bank account paying a zero rate of interest, or a negative real rate after inflation.  At least gold holds its value in the long term.

4 When the Fed stops printing money due to a better economy, real interest rates will rise, which will hurt the price of gold.

Perhaps.  The alternate view is that real interest rates will only rise when the economy has collapsed, which may be very good for the price of gold.

5 Risky government bonds push people to gold, but the perception is that government bonds are not risky, which reduces the attractiveness of gold.

Government bonds are only perceived to be less risky because the average person doesn’t understand the nature of risk, and even if they do, they don’t know where else to put their money.

6 The far-right lunatic fringe hyped gold, which is silly, its a barbarous relic.

Yup, it’s all Sarah Palin’s fault?

I take an alternate view.  I agree that gold is lower today than it was a year ago, but we are still in a long term bull market, and as long as the government keeps printing money, it will continue to increase in the long term.

My problem with Dr. Roubini is that back in 2007 he predicted further declines in gold.  Gold was in the $700 range when he made that call, about 50% lower than where it is today.

In November 2009 Roubini said that $2,000 gold was “utter nonsense”.  When he made that call gold was under $1,100 per ounce, and he said that “Maybe it will reach $1,100 or so but $1,500 or $2,000 is nonsense.”  For the record, the price of gold exceeded $1,900 in late summer, 2011, so I guess he was right, $2,000 was not achieved.  However, he did say that $1,500 was nonsense, and he was clearly wrong on that one.

I don’t fault the guy for incorrect past predictions.  You can check out our predictions page and see that I am often wrong; I’m not infallible.  Of course I don’t go on TV or give interviews with my predictions, either.

Here’s my point: Just because apparently smart people say gold is going down does not mean that gold is actually going to crash.

It might, or it might not.

I choose to look at the evidence and make up my own mind, which is what I have done.

I’m holding, and if we get a crash, I’ll be all in.

Thanks for reading, and thanks for “keeping the faith”.  See you next week.

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