I’ve always had great respect for Nouriel Roubini. Not only because he was my Econ professor at NYU, but also because he is not afraid to take on controversial issues in economics with a very strong opinion. Harry Truman said it best “All my economists say ‘on one hand’, and then adding ‘but on the other hand’”. He then said “give me a one-handed economist”. Roubini is one of the few “one-handed” economists.
Roubini has long been a classic Keynesian and his views on gold has always been negative. But his hatred of gold has turned into a fierce crusade in recent days. After first doing battle with Zero Hedge on Twitter, his anger has now turned to gold and gold bugs.
So, what’s his beef? Well, first, as a Keynesian he obviously hates gold. I have no problem with that, everyone’s entitled to their own beliefs. But he has two other points worth discussing: 1) the impact of leverage on the price of gold and 2) the vast amount of hype, misinformation and crack theories being spread across the Internet.
Regarding leverage, it is interesting that Roubini argues that the high leverage allowed for gold futures trading and the ability of even physical buyers to borrow almost the entire purchase price had driven the gold bubble higher. Most gold bugs think the opposite - that leverage is used by shorts to suppress the price. However, common sense supports Roubini. As with housing, stocks or any other asset, speculators throughout history have used leverage to drive asset prices up, not down. Take the example of housing - no money down mortgages, no doc loans, etc allowed the public infinite levergage to drive the housing bubble to its ultimate peak. When the leverage was stopped, prices collapsed.
Some gold bugs argue that if Comex and the LBMA collapse it would be positive for gold prices, but in reality it would be the opposite. As seen from the impact of margin increases in gold and silver, it is the longs that are using the leverage, not the shorts. Think about what would happen if everybody had to pay 100% cash to buy a home. Would that be positive for housing prices, or negative? It would be the same for gold.
The second main point in Roubini’s stream is the extreme way gold has been pushed on the public. As mentioned in Yukon’s rant, conspiracy and doomer entrepreneurs have no limit to how low they will stoop to push their cause. From simple misinformation to conspiracy theories, proclaiming impending doom and calling for the execution of public officials, these guys will do and say anything. The result is that the more objective, clear thinking gold bugs like ourselves are grouped in with these nutcases while the true case for gold is obscured beyond recognition. True gold bugs should rise up and reject the nutcases and bring the discussion back to the mainstream, or the public will end up siding with Roubini and reject gold once and for all.
While many of us may dismiss Roubini’s arguments as the rants of an elitist intellectual, there is some truth in those statements. Considering and reflecting upon his statements would do us all a lot of good.