Why Krugman, Roubini, Rogoff And Buffett Hate Gold

Why Krugman, Roubini, Rogoff And Buffett Dislike Gold

By Jan Skoyles  Edited by Mark O’Byrne 

A couple of weeks ago an article appeared on Bitcoin Magazine entitled ‘Some economists really hate bitcoin’.

I read it with a sigh of nostalgia. As someone who has been writing about gold for a few years, I am used to reading similar criticisms as those bitcoin receives from mainstream economists, about gold.

As with bitcoin, gold is just a step too far for many economists. Criticism is often, as with bitcoin, targeted at the people who invest in it, rather than the asset’s own track record, fundamentals and safe haven attributes – classic attacking the ball and not the man.

This frequently involves name calling and the pejorative ‘goldbug’ label. This is used to try and discredit anyone who says anything positive about gold including being bullish on the price or seeing it as an important diversification. Often some of the gold naysayers refuse to distinguish between gold as a diversification in an investment or pension portfolio and gold’s role as a hedge against currency devaluations on one side and on the other calls for a gold standard.

Two completely separate matters – one pertaining to monetary policy and the other to investing, saving and personal finances.

In my experience to invest in gold is seen by the critics as the ultimate rejection of central banks, financial systems and government. These critics believe that faith in something that just gets mined out of the ground is baseless compared to something that ‘involves human endeavors (like stocks)’ as Joe Weisenthal of Bloomberg argued.

This ignores the fact that the production of gold, refining of gold, minting and fabricating of coins and bars and indeed the brokering, delivery and storage of bullion, and the running of the myriad of different precious metal companies involved in this quite large industry involves human energy, innovation and endeavours.

Below I touch upon some of those critics who continue to dismiss either gold as an investment or as a form of money which may play some role in the monetary system.

Oracle of Omaha, Warren Buffet

Warren Buffett is not an economist but you can guarantee that more investors pay attention to the Oracle of Omaha’s views than the majority of those economists – particularly statist ideologues.

Buffet has even debated with Marc Andreeson over bitcoin. Many believe that he dislikes bitcoin, but this may not be the case, he may just see it as a development in the world of payments – an upgrade from writing a cheque or sending a wire transfer. It is not ground-breaking stuff.

Where Buffet’s problem with bitcoin lies is exactly where it lies with gold – he fails to see the intrinsic value of it. Bitcoin is ‘not a currency’ it is a ‘mirage’ according to Buffett.

When interviewed by CNBC in 2009 he said of gold “… it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that,” he said. “The idea of digging something up out of the ground, you know, in South Africa or someplace and then transporting it to the United States and putting into the ground, you know, in the Federal Reserve of New York, does not strike me as a terrific asset.”

At the beginning of the year Berkshire Hathaway increased its shareholding in oil refining company Philips 66 to 13.7%. This was seen as a bet on oil prices. The company had chosen to ignore the current top performing commodities that were gold and silver, and the shares of Berkshire Hathaway were underperforming in comparison.

In 2009, prior to gold going parabolic from 2010 to 2012, GoldCore also pointed out how gold has performed Berkshire Hathaway over a 4 year and a 10 year period. We pointed out and were quoted by Bloomberg how gold’s utility was simply “in balancing a portfolio.” We said that the point is that gold had “preserved a chunk of wealth that would have been otherwise taken down with other financial instruments,” see here.

The Daily Reckoning also pointed out “an investor who purchased gold at any time after January of 1998 would have received a higher investment return over the following 10 years than an investor who purchased Berkshire Hathaway.”

This is not to suggest that Berkshire Hathaway has not been a great investment for its owners – it has. Rather it shows that there are periods of time when gold outperforms most, and frequently all, other investments and hence its importance as a hedging instrument and a safe haven asset.

Dr. ‘Doom’ Roubini

We have some respect for Dr Roubini as a macroeconomist and have indeed shared many of his concerns in many years and shared them with our clients and the wider public as long ago as 2005 and 2006 when he and we warned that the US would soon follow in Iceland’s footsteps and have its own financial crisis. However, giving financial advice is not his expertise and he may be better suited focusing on his strengths.

As Roubini is regarded as a guru by many experts and opinion makers internationally, there is a real risk that his opinions regarding gold could lead to poor and imprudent investment decisions.

In December 2009, when gold was at $1,100/oz, he said that “all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense.”

In the following years gold rose to over $1,500/oz and nearly reached $2,000/oz when it surged to $1,915/oz in 2011.

One of our clients actually sold their gold allocation on the basis of this statement. Despite gold being the one asset class that had protected them in the early stages of the crisis in 2007, 2008 and 2009. Gold nearly doubled after Roubini’s pronouncement.

In August, 2013, when gold has already fallen in price and was trading at $1,300/oz, Roubini predicted that gold would fall another 23%, back to $1,000. Not only that but he said that this would happen “at the end of next year”.

Reasons given were that: “Now with the economy recovering, nobody wants to be in rocks that don’t pay any dividends. Real interest rates are rising. That kills gold…Governments with debt issues are selling gold…Gold was juiced by right-wing fanatics in the US. That boom is over… gold remains John Maynard Keynes’s “barbarous relic,” with no intrinsic value and used mainly as a hedge against mostly irrational fear and panic.”

Where to start with this logic and poor analysis? There has not been an economic recovery of real substance, real interest rates do not appear to have risen and the gold price has performed quite well over the medium and long term. Gold has gone sideways after a period of multiple annual yearly gains.

To be fair, it is difficult to call Roubini an all out gold-hater as he does suggest that “all investors should have a very modest share of gold in their portfolios as a hedge against extreme tail risks.” However, he doesn’t think it’s crucial and that “other real assets can provide a similar hedge, and those tail risks – while not eliminated – are certainly lower today than at the peak of the global financial crisis.” Given the deteriorating financial position of systemic Deutsche Bank, Roubini may need to revise that assumption soon.

Roubini has been very vocal in his anti-gold stance. Indeed, he has even engaged in Twitter wars with GoldCore’s Mark O’Byrne and James Rickards, over the gold standard.

There is little doubt that Roubini is a very smart economist, however he just cannot get to grips with the role of gold. Describing those who like gold as ‘gold bugs – a combination of paranoid investors and others with a fear-based political agenda.’ He likes to throw gold and bitcoin fans into the same category. He tried to engage Jim Rickards and goldbugs in Twitter war back in April 2013. When Rickards pointed out a few truths about the gold price he turned his attentions “Gold-bug suckers found another irrational useless bubble fad, the Bitcoin, the bubble flavor of the day. So they are dissin gold 4 Bitcoin.”

Roubini has also resorted to the silly old argument that “you can’t eat gold” and said that: “If you want to hedge against inflation, stock up on Spam or other canned food”

Ignoring the somewhat obvious fact that you cannot eat any investment or currency – whether that be stocks, bonds or dollars, euros or pounds. Unlike, spam and canned food, gold is one of the most traded assets and liquid investments in the world – especially in a crisis. There is always a market for gold and it can always be exchanged for cash or indeed used to buy food, farms, property and businesses. A cursory analysis of gold’s performance in economies suffering financial and economic crisis would show Roubini the value of gold as a currency hedge and indeed a hedge against systemic contagion in an economy.

Thus, Roubini has a questionable track record when it comes to gold and his arguments against it are poor.