5 Reasons Gold Is Going to Rise: A Response to Nouriel Roubini

[bobbyw24]

The U.S. Senate passed a $1.1 trillion spending bill this Sunday, December 13th. Five other appropriation bills for fiscal year 2010 were previously passed earlier this year and one more still remains, a $626 billion defense appropriation. The defense appropriation bill will contain a clause to raise the national debt ceiling. The national debt ceiling is currently $12.1 trillion and the U.S. is tapped out once again. As of now, it looks like Congress will raise the debt ceiling by $1.8 trillion to $13.9 trillion. The last increase was only $0.8 trillion, but that would only last months at this point. Even with a $1.8 trillion increase, the U.S. Congress will be fortunate if it doesn't have to raise the ceiling again before 2010 runs out.

The increase in the U.S. national debt is now so great that the monthly rise can be as high as the entire debt load in the 1960s (before the U.S. went off the gold standard). The U.S. is also by no means unique. The spending spree taking place is global and includes all major economies. In the midst of this spending and money printing orgy, there are a number of economists who claim it will not hurt the U.S. dollar and will be a negative for gold. In order to come to this conclusion, they have had to ignore a greater than 2000 year history that indicates otherwise. The Romans engaged in long-term debasement of their coinage and paid for it with out of control inflation. Since then, the use of paper money has made currency debasement much easier and quicker. Nowadays, central banks can create any amount of currency they want through a simple computer entry. What they can't create out of thin air is actual money.

History is littered with fiat currencies (currencies not backed by hard assets) that have failed. There is no fiat currency that has survived over time. There is also no case of currency creation that significantly exceeds economic growth that hasn't led to inflation. This idea is by no means new. Copernicus the famous astronomer was one of the first to articulate it in the 1500s. It is based on simple arithmetic. If you double the amount of currency in circulation, but the economy doesn't change in size, goods and services will approximately double in price. This does not happen instantly, however. There is a delay from when a government increases money supply and when consumer prices rise. In the 1970s, money supply in the U.S. increased by the largest amount in 1971, inflation peaked 9 years later, as did the price of gold. So don't expect to see the full impact of today's monetary policy actions until late in the next decade.

Economist Nouriel Roubini has just released an article on why the price of gold will fall. It should be kept in mind that Professor Roubini is an economist and not a professional investor. Unlike myself and a number of other bloggers, he does not publish when he buys and sells assets, but tends to make broad sweeping generalized comments. This approach is rarely helpful to investors who are trying to make money in the market and usually works to accomplish the opposite. Let's look at Roubini's five reasons gold will fall and deal with them point by point:

Point 1: The U.S. dollar carry trade will unravel.

Continue

http://seekingalpha.com/article/1781...cle_sb_popular

[bobbyw24]

The rally in gold prices is developing into a bubble and the precious metal faces "significant risks of a downward correction," Nouriel Roubini, chairman of RGE Monitor, said in a research note, the Financial Times reported Wednesday.


"The recent rise in gold prices is only partially justified by fundamentals, and is in part a bubble that could easily go bust," Roubini wrote in the report titled: "The new bubble in the barbaric relic that is gold."

The note was circulated to investors last week but made available to the public Wednesday, the FT said.

Roubini gained notoriety for correctly predicting the financial crisis, earning him the nickname of "Dr Doom."

If the global economy enters a period of high inflation or slips into a depression it could cause gold to surge toward $2,000 an ounce, Roubini conceded in the report. But there is "little reason" for such a strong rise unless that happens, he said, according to the FT.

Another potential cause of a gold spike would be if the fiat currencies were "rapidly debased via inflation;" this could happen if countries' ballooning budget deficits were not reined in, the note said.

http://www.cnbc.com/id/34443089