Nouriel Roubini’s Much-Needed Lesson in Gold Fundamentals

Following gold’s sell-off earlier this week, NYU economics professor Nouriel Roubini wrote on his Twitter account “Gold at a 7 weeks low down to 1635. Where is 2000 gold dear gold bugs?”

Roubini’s comment stems from a prediction he made on October 22, 2009 that the price of gold would not reach $2,000 per ounce.  At that time the yellow metal traded near $1,060 per ounce.

While the noted economist – who to his credit accurately predicted a considerable amount of the 2008 financial crisis – has thus far been correct about not seeing a $2,000 gold price, additional comments he made at the time suggest his gold argument has several holes in it.

Specifically, he stated that “Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies. So there’s no inflation, and there’s not going to be for the time being…The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression.”

Although neither of those scenarios have played out, gold is now 48% above its October 2009 level, even when accounting for its decline in recent months.  Furthermore, Roubini conveniently failed to mention in his tweet that two years he also predicted that gold would not reach $1,500 per ounce.

The facts therefore indicate that Dr. Roubini’s tweet was a bit inaccurate, to say the least. Fortunately for him and all of his Twitter followers, Michael Shedlock – author of Mish’s Global Economic Trend Analysis, who has been bullish on gold for the majority of its 11-year bull market – provided the NYU professor with a much-needed lesson on the factors that actually do influence the gold price. Highlights from Shedlock’s article follow:

The fact of the matter is gold does well in deflation. It also does well in times of credit stress. There is immense credit stress right now in sovereign debt in Europe…Moreover, central banks have on-and-off stepped on the monetary pedal in unison to combat recessions and deflation. Gold has reacted to that. Recently, gold has reacted to Fed statements regarding QE3 and bond buying by the ECB.

Gold may or may not track short-term fluctuations in the US dollar, but on a long-term basis it is clear that it doesn’t. History suggests central banks will step up the printing presses again. When that happens, I expect gold to make another all-time high.

All anyone can really say is the fundamentals for gold are strong because the fundamentals for credit stress and central bank printing are strong.

Clearly, gold is not the fantastic bargain it was six years ago, but it is still a relative bargain as long as the fundamentals hold, no matter how the US dollar meanders over time. Maybe this correction steepens, and maybe it doesn’t, but the fundamental case for gold has not changed one bit.

When it comes to bailouts and printing money, it is nearly given central banks will try it, with more and more force, each time. The irony Nouriel, is you are begging them to do just that, every step of the way.

Gold has only fallen because central bankers ignored (for the time being), your foolish recommendations to print and spend more money.

If central banks do not resort to the printing press, if governments do not give in to more absurd Keynesian stimulus ideas, and if the US budget deficit is brought under control, then, yes, gold may have topped.

How likely is that?

Nouriel, if you want to better understand the fundamentals of gold, I advise you to look in the mirror and recite your “cure” for the economy.

How long have you been bearish on gold anyway? For something like forever or simply the last 1000 points? Regardless of your answer, the monetary policies you yourself espouse would have us at $2000 right now.

Instead, central banks have actually acted more rationally (for the time being) than many expected.

No one can predict short-term movements, but it would behoove you to understand long-term fundamentals or gold will make you look like a fool, yet again.