First it was the IRS targeting conservatives and the Tea Party. Now it isDr. Doom, aka Dr. Nourial Roubini, who is accusing the “extreme conservatives” of distorting the price of gold and SPDR Gold Trust (GLD) and its lesser known half-brother iShares Silver Trust (SLV) with their incessant cable TV hype. Those darn paranoid anti-government conservatives have created a counterproductive bubble in gold. Being a conservative and Tea Party member, I should be offended, but I’m not:Dr. Doom is correct.
I’ve attended many political events and have listened and debated the conservative’s misguided views on monetary policy countless times. I’ve written many articles on the subject as well. My friends would try to get me to join their nonsensical “End the Fed” campaign and I would ask them “what will we replace the Fed with then?” They would say “with nothing,” and I would then ask, “then how will we stop bank runs?” The conversation usually would stop at that point. Facts are the reasoning my fellow conservatives use to justify gold is just plain wrong, and totally inconsistent with the way the Federal Reserve operates, and modern monetary policy is run.
Unfortunately, many are now waking up to the error of their ways as the price of gold is trading well below its peak.
“These fanatics also believe that a return to the gold standard is inevitable as hyperinflation ensues from central banks’ “debasement” of paper money. But, given the absence of any conspiracy, falling inflation, and the inability to use gold as a currency, such arguments cannot be sustained,” he added.
While my often Pollyannaish optimism is usually at complete odds with the doom and gloomy Dr. Roubini, in this case, I’m in total agreement. In this video, Dr. Roubini explains why he views gold as going lower:
1) “Tail risk” is greatly reduced, a repeat of the global meltdown is highly unlikely.
2) In spite of QEfinity, inflation is falling rather than going higher. Anemic growth isn’t likely to change this anytime soon.
3) The real interest rates are negative. Interest rates are unlikely to go lower, and are much more likely to head higher.
4) Other assets are not providing attractive alternatives. Interest rates and equities are going higher that provide capital gains and income, where gold is a purely capital gain play.
5) Slowing global economies will work against the price of gold.
6) Gold is not a currency, and cannot be used as a means of exchange.
In another article, I found a slightly different Dr. Doom 6 reason list:
- Gold spikes during serious crises, but even when it is “metaphorically the time to stock your bunker with guns, ammunition, canned food, and gold bars,” bullion can still correct sharply as has now happened and falls are usually exaggerated by margin calls.
- Gold performs well when the risk of runaway inflation is high, but “even though successive rounds of “quantitative easing” have doubled, or even tripled, the money supply in most advanced economies – global inflation is actually low and falling further.”
- Unlike equities, bonds or real estate, gold does not provide any income and with the global economy recovering, investors are rotating into these asset classes.
- Gold was boosted as QE pushed inflation adjusted interest rates into negative territory, but real interest rates are now rising and hurting gold.
- Even though its reserves are tiny, threats by Cyprus to sell its gold panicked the market in April. Other governments struggling with debt like Italy may be tempted to do the same and since it has $130 billion worth of gold, it could really move the market down.
- “Extreme political conservatives, especially in the United States, hyped gold in ways that ended up being counterproductive,” and the far-right arguments about currency debasement, a return to the gold standard and hyperinflation “cannot be sustained.”
In conclusion, even though I would be categorized as one of those Tea Party conservatives, I agree with Dr. Doom’s view on gold. My conservative brethren are simply wrong with their views on monetary policy, the Federal Reserve and the value of gold. I’ve written manyarticles on this topic, and I only hope my fellow members on the right side of the political spectrum take the time to understand how the monetary system really works, instead of allowing conspiracy books like the Creature from Jekyll Island and cable TV commercials guide them into making investments in gold based upon myths, distortions and fear mongering.
Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.