Nouriel Roubini posted via Zero Hedge a somewhat rambling dissertation on the gold market:
In recent months gold prices have risen dramatically, first breaching the US$1000 barrier, then jumping another 20% in the past few weeks, surpassing US$1200 before correcting downward again to around US$1100. Some gold-bug bulls say the gold price could eclipse US$2000 in the next couple years. Is that possible? Is the recent rise of gold prices justified by fundamentals? An analysis of the facts suggests that a good part of this rise in gold prices is driven by a bubble.
A Recap of Recent History
Gold prices rise sharply only in two macro situations: first, when inflation is high and […]
Blah, blah blah, bla- bla bla blah!
I love Roubini, nobody says “Bah- bul” quite the way he does. “Bah- bul, bah- bul, bah- bul!” The end of the bubbles will be the end of the Roubini romance. You can read the long version for free @ Zero Hedge with comments and whatnot.
We disagree with the professor across a few key points. As Dr. Roubini himself will acknowledge, the primary reason for the rapid “improvement” in asset valuations, and the postponement of the double dip/next leg of the depression, is solely due to global central banks having themselves onboarded private sector asset exposure as the very last option to prevent an all out collapse of the financial system:
I waver. There is nothing intrinsically wrong with holding some gold as an investment as well as a short- term emergency fund when nothing else will do. Many people in Europe were able to flee the Nazis to Britain and America because they had some gold to trade for transit, food, clothing and documents. Those were the smart ones, the ‘dumb money’ clutched their hidden gold as they rode the death trains to Auschwitz and Treblinka. Like people today, they had little idea what the future had in store for them.
Gold has severe limitations in the situation that is unfurling at our feet. Resource depletion is permanent. The emergency is continuous. In our brave new world gold is a tool the same way a hammer is a tool. The hammer is a better tool, you cannot pound nails with gold coins. Neither Roubini nor the incredible staff at ZH ‘gets it’ which is just too damned bad.
The traditional hedge against inflation in the US has been real estate. It can be had anywhere and everywhere and has ‘always gone up’. Okay, we’ll forget about that last part …
Real estate is NOT a hedge anymore … now what? There is NO inflation, except in some asset markets where – as ‘Tyler Durden’ notes, central bank liquidity and market manipulations are pushing up prices. The only hedge our collective future will allow will be ‘Do’ rather than ‘Have’.
The ownership and use of machines has deprecated human skill, labor, artistry and collaboration. As oil depletion deprecates machines and machine values the once- spurned human abilities will emerge from wherever they have been exiled to. There is simply no other choice; to have a functioning civilization, these values are essential building blocks.
Gold ownership presumes that current economic difficulties are transitory and that the gold can be ‘sold back’ for currency sometime in the future at a profit. There is no other value- acquiring strategy to support gold ownership. The ‘gold bar/can of beans’ trade is not a good one … unless you really need that can of beans.
Nobody alive today is old enough to recall the corrosive speculation in gold by banks and others during the early 1930’s. Sovereign gold holders defaulted and abandoned gold. A large percentage of world’s … and US banks failed.
Gold speculation and arbitrage emerge during crises where gold currencies have always failed. I can explain further, but the details are time consuming. You can certainly figure most of these out for yourselves. In general, the same gold will have different prices in different areas and much productive effort is wasted buying gold in one area to sell it in another.
Some consider gold to be an alternative form of currency against ‘other, fiat’ currencies. Willem Buiter points out in a fiat universe, all things including gold’s putative value are fiat. Gold is not a currency. No citizen buys gold today to elevate the condition of his neighbors by circulating his gold to facilitate commerce. Rather, he clutches his gold in his basement with one hand and a belt- fed weapon in the other with the intent of murdering his neighbors.
People become confused about credit and money creation. Finance creates credit denominated in some currency. Central banks and treasuries create the actual currency; the Federal Reserve pays for currency created by the Treasury with credit. Mr Bernanke is facilitating the laundering of illiquid dollar- denominated credit instruments into cash for his friends in finance. He and his partner-in-crime Mr Geithner are creating currency as fast as possible. Finance has many illiquid credit instruments; hundreds of trillion$ more of them than the Fed has available currency. Most credit instruments will never be converted; those ‘in queue’ are hoping against hope the current dollar slump lasts long enough so that they too … can trade their worthless ‘securities’ for cash.
As a consequence of Bernanke’s currency/securities trade, currency has vanished from circulation in large areas of the country. This is why the US is in a depression with millions of unemployed. In the real world, the effects of Bernanke’s ‘money printing’ are negligible. Read the brilliant Steve Keen or other monetary economists for more nuggets of useful currency creation info.
There is physical gold and derivative gold or ‘paper’ gold which is the form most retail gold takes. There are numerous sites on the Internet pitching ‘you buy and we hold’ schemes. Since there are many more paper claims on gold than there is physical gold, the settlement of these claims will be done in currency. This is ironic; the gold basis has enjoyed an increase in value. The the paper claim in dollars against the metal may appreciate in value even more!
If your timing is good and you bought gold early enough, a paper gold trade might be a very good trade, indeed!
If and when the economy truly collapses, the paper claims will be repudiated. Gold purchasers will have neither gold metal nor currency. Suckers!
In the futures market there are also more long positions than physical gold for delivery. This implies a large short position held by the exchange itself and its banker(s) including Goldman Sachs. Uh oh …
If contract holders want to settle rather than roll over into new contracts, ‘delivery’ will be in currency not physical. This dollar/gold derivative trade is part of Bernanke’s money laundering racket. The gold itself is meaningless, what matters is margin being converted to cash. It’s a big reason gold prices have risen against the dollar, ditto stocks and bonds against the dollar. Don’t fight the (crooked) Fed!
When the market turns and holders want to or have to sell to meet margin, there will only be one buyer … Goldman- Sachs! Sorry ’bout your gold trade, dude! See Hunt brothers’ silver corner for more info.
It is also likely the Saudis and other Middle Eastern purchasers are partially behind the recent strong rise in gold prices. The Saudis have been buying physical gold for a long time. Since the Saudis have indicated they will hold crude oil prices below $85 they may be buying gold as they sell oil, transferring increases in the oil price above $80 to the metal. In other words, the dollar- debasement trade is shifted from dollar/oil to dollar/gold by arbitrage.
The outcome of this trade is to make the dollar a very hard ‘petro- dollar’. Welcome to an extremely deflationary currency regime, gold bugs! You are getting all that you wish for! I hope you like the outcome, which will leave solid middle- class citizens and their families begging and camping out in cardboard boxes.
The Saudis have just flipped Bernanke the bird; Saudia, not China, has the US economy by the balls.
I suspect this dollar hardening against oil is behind the rise in its value against other currencies. Keep in mind, a hard dollar still allows for a very high real price for oil; there is no escape from that! The hard dollar is starting the next deleveraging leg, which has been postponed since March by Bernanke’s talking down (shitting all over) the dollar and pimping gold. That’s right, the Fed has been boosting gold for its own nefarious reasons.
Saudi oil minister Ali al Naimi’s intent to prevent a crash caused by oil prices rising to $100/barrel is instead causing a crash resulting from a very hard dollar. Welcome to the ironic universe, where all possible policy approaches lead to the same outcome. That being; whatever is most destructive to the greatest number is the most likely.
The only exception is strict conservation, where the US can net- export enough of its own crude and thereby annihilate the Saudi’s dollar/oil peg.
When the short- dollar trade unwind gains momentum it will be very hard for traders to exit their positions. I suspect the smart money is already on the sidelines. It would be clever to close short- dollar trades now. Consider that a market call … that includes gold.
Remember, there is no hedge against deflation!