Chicken Little Roubini
Gold has no value. Whereas the Dollar...?
NOURIEL ROUBINI was "one of the few to predict the financial crisis" reckons the Financial Times. Yet plenty of other chicken littles, amateur and professional, had long warned of trouble ahead, too.
Hence the 150% rise in gold prices even before the crisis broke in August 2007. Set against negative real interest rates, unfettered bank leverage and runaway deficit spending, gold's rare physical persistence looked a fair bet. And absent Armageddon or double-digit inflation, a growing handful of people chose to store a chunk of their change in metal, starting around 2001.
Oh sure, gold has since outstripped the S&P's best-ever run of year-on-year gains (1982-1989). It's not fallen for more than two consecutive months either since April '01. But clearly, back then, and long before our present troubles showed up, these people were nuts!
At least, in Roubini's world they were. Which brings us right up to date.
This decade's three gold-friendly trends - of sub-zero rates, over-sized leverage and relentless state deficits - remain firmly in place. Sadly for fixed-income investors (i.e. everyone now or soon to be retired), the first and the third look set to blow up together, sooner or later. Quite when, who can be sure? But the quietly broadening move towards gold (Glenn Beck aside) rolls on as well. And so too, oddly, does the idea that gold only rises on the back of runaway inflation in consumer prices...or a wipe-out Armageddon in stocks and bonds.
Those two eventualities would likely push gold sharply higher from here. We might just get them all at once if current trends persist for much longer. Better to take a position ahead of time, you might guess. But no. Not if you're smart like Roubini.
"With no near-term risk of inflation or depression, why have gold prices started to rise sharply again in the last few months?" asks Dr.Doom himself of his RGE Monitor clients. Without those extreme events, this fall's rise in the gold price must be a bubble, he says.
"When inflation is high and rising, gold becomes a hedge against inflation; and when there is a risk of a near depression and investors fear for the security of their bank deposits, gold becomes a safe haven."
So far, so fair. But gold's performance from 2003-2007 - when it rose alongside everything else except the Dollar - shows that true chicken littles tend to move early. Inflation hedging is wasted if you wait until inflation has struck. Safe haven hoarding comes too late once the depression's begun. That's why, we guess, ever-more chicken littles continue to buy gold regardless of what the latest data might say. Because the coming collapse of the sky won't show in your rear-view mirror. Not unless, like a good many "gold bugs", you actually crane your neck round...and squint at history to help guide your driving through what are proving historical times.
Money printing typically leads to inflation; excessive leverage tends to blow up. Governments can in fact become bankrupt. The center of power rarely sits still for a century or more...
The problem, of course, is that gold pays no income and earns no quarterly cashflow. That makes it invaluable on contemporary metrics, a fact most pundits mistake for worthless. And "Since gold has no intrinsic value," says Dr.Doom, bounding ahead of his error, "there are significant risks of a downward correction."
Yes, he acknowledges six basic reasons why gold continues to rise. To save space - and show just why they might matter - we'll summarize Roubini's bull case as:
- money printing;
- bank leverage;
- the Dollar;
- falling mine output;
- Asian gold hoarding; and
- the ultimate "too big to save" of government itself.
Against this, however, Roubini foresees an end to quantitative easing and zero rates, buoying the Dollar. Or perhaps "the global recovery may turn out to be fragile and anemic, leading to...bullishness about the US Dollar." Or failing that, "the Dollar-funded carry trade may unravel, crashing the global asset bubble...together with the wave of monetary liquidity it has caused."
You will have spotted the common denominator. Massed against the six trends Roubini himself puts in gold's favor, the US Dollar will prevail. One way or the other. Perhaps. Either way, gold's recent rise to $1200 an ounce - let alone its jump to fresh all-time highs vs. all other currencies barring the Aussie Dollar and Japanese Yen - must be a bubble.
Because gold, unlike the Dollar, has "no intrinsic value".