THE WAR AGAINST GOLD (ROUBINI IS DEAD WRONG)

The war against gold continues.  Last week, New York University professor, Nouriel Roubini, published another article with singular aggressiveness, in which he said that by 2015, the price of gold will collapse to a thousand dollars an ounce.
Roubini is a well known Keynesian and always refers to gold as a “barbarous relic”.  Roubini became famous as one of the few economists who predicted the financial crisis that erupted in 2008, and since then, the mainstream media echoes his words every time he utters an outrageous prediction.
This is not surprising, since the interests of the so called “mainstream media” are usually –not by mere coincidence, the same ones as those of the monetarists and Keynesians: the monetary stimulus (QE), public deficits, bank bailouts, etc.

Nevertheless, this fantastic “guru” as some call him, has been wrong before on his perceptions about gold, and exhibits an enormous ignorance of the condition and quality gold has as real money, which he accuses, “has no intrinsic value “.

It is worth remembering how in December 2009, when its price months ago barely had exceeded once again 1,000 dollars an ounce, Roubini wrote on his website an article entitled “The New Bubble in the Barbarous Relic That is gold”.

On it, he listed five reasons why it was ready to slump into a bear market.

Well, his prediction was so flawed that in September 2011, gold reached its all-time high of $1,923.70. Roubini, as a “specialist”, is a terrible market timer.

On the other hand, it is true that thereafter gold entered into a correction period that has been here for 21 months, but in no way, was it even close to forming a bubble.

It is clear that Mr. Roubini does not understand the markets. The gold bull market is not over.

Bubbles occur only when “everybody” is investing in a particular asset class, it is spoken everywhere and new all-time highs are seen on a daily basis.

It should be noted that in real terms gold was never close to a new record, because measured by official inflation, the old 1980 price ($850) is still well over $2,300 at 2011 prices.

September 6^th, 2011, will be marked as the turning point, the date on which the interests of the powers that move (manipulate) gold prices, decided that it had gone up too much.

Since then, we should see the gold market from two perspectives: the purely technical and the political one.

The former showed signs that a healthy and necessary correction was coming, and finally happened.

The latter, much more important, is responsible that it occurred in a very drastic way, and that every hike in gold prices is now repelled by a massive attack of paper “gold” sales in the futures market.

The major offensives unleashed on April 12^th and 15^th, are paradigmatic.

Now that the price is around $ 1.400 an ounce, Roubini is attacking again. He states that the 30% correction in gold ensures that it will fall even lower.

Of course this is possible if, on one hand, we consider that a typical correction means a 40% fall from highs, and on the other, we observe that gold is still in “backwardation” (the price of spot gold is more expensive than the futures price, and not vice versa as it is normal) in a deflationary context.

Former attacks have been increasingly severe in the attempt to take gold out of that “backwardation”, so the bearish (artificial) pressures could continue for a while.

The bad news for the manipulators is that they worsen everything.

The “backwardation” condition emphasizes that the physical metal is “scarce”, and every time they knock down the price, instead of scaring smart investors out of gold, they run to buy all they can. For the “strong hands”, it is a very good way of acquiring high value at very low prices.

“Scarce” appears in quotes, because there is no such thing as a gold “shortage”. Almost all of the gold ever mined on planet Earth is still here with us in one way or another (175,000 tons), so one of the reasons why gold is in “backwardation”, is because people are “hiding” more and more their physical holdings.

By the way, it would be a mistake to overlook the enormous increase in Asian demand for jewelry, bars and coins. There is no doubt that much of those inventories are leaving Western hands to go to the Far East, from where they will never come back.

Now, even Roubini can perceive the global deflationary phenomenon, and therefore predicts a disastrous outlook for gold, which is considered the ultimate safe haven in times of high inflation.

That’s a typical error of monetarist and Keynesian schools, unlike the New Austrian School of Economics. It is much more important to observe the gold Basis (in over simplified terms the Futures Price- Spot price) and Cobasis (Spot price – Futures price) than to look at the simple price.

The gold Basis and Cobasis are telling us with the “backwardation” (positive Cobasis), that every day less and less smart investors or “strong hands” are willing to sell their holdings, which anticipates that the futures market, eventually, will collapse. This “backwardation” in gold tends to become permanent, the trend is very clear.

In this deflationary scenario, the big losers will be those paper “gold” owners. They will be paid in devalued fiat currency (dollars, euros, pounds, etc.) that central banks will print to bailout the system, as usual. There is no enough physical gold for all.

So, will people sell their gold for $1,000 as Roubini says? Would anybody sell their treasures at bargain prices?

No. Gold is necessary in inflationary periods, but indispensable in deflation, where the direct exchange or barter is the end of the way. The entire planet will understand then that the value of gold as real money has not changed at all.

Of course, Roubini says gold is not money simply because “you cannot pay for your groceries with it”. Actually, his statement tries to deceive people.

The quality of money for gold and silver was acquired by the free and spontaneous will of human beings interacting in the market, without state intervention.

Therefore it is irrelevant that the laws of the state have demonetized them by force, as their essence remains intact.This irrationality will be corrected one day, by market forces, and the consequences will be dire.

In the next article, we will discuss this cunning demonetization plan, first for silver in 1873 and one hundred years later for gold, which made possible the true anomaly: the existence of a fiat monetary system.