In December of 2009 well known economist and NYU professor Nouriel Roubini provided his professional opinion on where the gold price was headed:
“I don’t believe in gold,” Roubini told CNBC. “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 above 10 percent in all the advanced economies.
The only way gold can go higher in a deflationary economy is a financial Armageddon, Roubini says, but we’ve avoided that tail risk as well.
So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense, Roubini asserts.
At the time, the precious metal was trading at $1125 per ounce.
This morning, gold touched a nominal price high of over $1600.00 for the first time in history:
If Nouriel Roubini’s reasoning for why gold would rise in such an environment is to be believed, then there are two likely causes.
One of them is inflation, and while some can argue that deflationary pressures on everything from employment to credit borrowing should be keeping the price of gold well below $1600, so too can we make the argument that the US Federal Reserve has injected trillions of dollars into the financial system, forcing prices of stocks, commodities and even precious metals to skyrocket. Mr. Roubini no doubt closely follows the official Consumer Price Inflation figures provided to him and his colleagues by the US Bureau of Labor and Statistics, which show that inflation (less food and energy costs) is about 1.6%. In reality, however, the actual rate of inflation is somewhere in the area of 10.6%, providing some explanation to the consistent price rise in gold for the last 18 months.
Inflation effects aside, we submit that Mr. Roubini’s second point is the primary reason for gold’s rise to $1600. The global marketplace is and has been losing confidence in the ability of the government sector to manage, mitigate and resolve the economic crisis. Historically this has been a key factor in determining the value of gold, and this time around is no exception.
In 2009 we opined:
The other scenario, and much worse than scenario #1, is economic Armageddon. Mr. Roubini believes this has been avoided. This may very well be true, though paranoid doom and gloomers must wonder how we are to avoid economic and financial Armageddon with another wave or real estate collapses coming, consumer spending coming to a stand still, world trade getting destroyed, consumer and commercial credit lending frozen, and the US government taking on more debt in terms of borrowing and entitlements than any nation in the history of the world.
Eighteen months hence we submit that even though we were being told by the likes of Mr. Roubini that everything was going to be fine and tail risk had been avoided, we can now see that no such risk has been reduced and we are potentially much worse off today then we were then.
As we see absolutely no solution to the overall malaise facing our Nation and the world, we expect to see gold continue to rise for several years to come. There will certainly be some ups and downs, and we can expect extreme volatility as the system we understand to be our economy seizes up, but the long-term projections for gold remain intact.
While we have seen a historical high of $1600 for gold today, we are nowhere near what the price should be if we adjusted the 1981 high for inflation – which would put us at roughly $2300. Considering that this recession is (by official accounts) the worst crisis since the Great Depression, and literally nothing other than the stock market has showed any significant improvement over the last two years, there is the real risk that another meltdown much worse than the 2008 collapse will drop us even deeper into what many are calling The Greater Depression.
Economic Armageddon may very well be just around the corner.
If this is the case, and the economic problems are not transient, as Mr. Bernanke has suggested, then we can expect gold to reach levels never imagined by the likes of Nouriel Roubini or the ‘gold is not money‘ crowd that includes experts like Mr. Ben Bernanke.