Nouriel Roubini’s nickname is “Dr. Doom,” but unlike other noted doomsayers who warn about massive debt and deflation, he’s a Keynesian. So his views are more in line with the likes of Paul Krugman — more spending, please — than many of the uber-bears with whome he’s frequtnly lumped in.
And like other Keynesians he’s not a gold bull. Remember, Keynesians believe in the curative power of paper money.
On Friday he dropped a roundhouse kick on the gold bulls with a post at Roubini.com about “The New Bubble in the Barbous Relic that is gold.”
Via ZeroHedge, here are his five reasons why gold is toast:
First, the dollar carry trade may at some point unravel, popping the global asset bubble that this carry trade has fuelled.
Second, central banks will eventually need to exit quantitative easing and effectively zero policy rates, which will put downward pressure on risky assets including commodities.
Third, bouts of global risk aversion may occur as the global recovery may turn fragile, anemic and subpar, thus leading to a rise in the U.S. dollar that would drive down prices of commodities and gold in dollar terms.
Fourth, since the carry trade and the wall of liquidity are causing a global asset bubble, some of the recent rise of gold is also bubble driven by herding behaviour and momentum trading, pushing gold higher and higher. But all bubbles eventually crash and the bigger the bubble the bigger the eventual crash.
Fifth, the effect of rising sovereign risk on gold prices is ambiguous, as the events of recent weeks suggest. A risk in such risk could push up the price of gold if it leads to expectations that central banks will eventually monetise those fiscal problems. But in practice it has weighed on the price of gold because it has increased investors’ risk aversion and led to a rush into a different (and more liquid) asset than gold—e.g. the U.S. dollar—thus pushing gold prices down. In general, gold always competes with fiat currencies and anything that is dollar bullish—like repeated bouts of global risk aversion—tends to be gold bearish.
Thus, the gold bugs are wrong—or at least very, very premature—in justifying buying gold as an attack on fiat currency. The velocity of money is still low or falling—the opposite of a currency crisis or run on the dollar. As a further indication of the collapse of credit/money multipliers, indicators of expected inflation are subdued or falling, despite governments printing money (excess reserves). The high inflation scenario may be constrained even if/when easy money gains too much traction, as the yield curve would steepen sharply, raising the discount rate for risky private sector debt and for corporate equity, limiting the speed of the recovery and hence the ability of states to impose inflation surprises in the context of shortening average debt maturities.
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