Spam and Gold as Inflation Hedges

Written by John N. Katz, The Goldwatcher

‘Spam is a better hedge against inflation than gold: you can eat it and it lasts 1000 years. Gold is, as Keynes aptly said, a barbarous relic’

Roubini 9th November 2009 Tweet

The above Tweet posted in November 2009 is surprisingly inaccurate coming from a man of Roubini’s academic and world stage standing. Keynes is often cited by badly informed commentators as having said gold was a barbarous relic. But he never said that. Keynes said ‘The Gold Standard’ was a barbarous relic. Roubini knows the difference between gold and the gold standard. He should stick to the facts.

And, as for his claim that 1000 year old spam would be an edible commodity , the only response is ha, ha, ha – it was funny when he first made the joke years ago but it isn’t any more. And its banal to suggest spam would be any kind of protector of wealth for people in countries like Iran , Egypt, Libya, Syria and maybe even Turkey now; Germany in the 1920s; Zimbabwe a few years back, South Africa as recently as the 1980s when the Rand crashed, Cyprus a few months ago and maybe Greece, Spain, Italy and even France in the not too far distant future.

Roubini’s Project Syndicate Gold Price Predictions

This comment on Roubini’s December 2009 gold forecast comes from Kenneth Rogoff’s $10,000 Gold? comment in the same publication:

‘…It has never been easy to have a rational conversation about the value of gold. Lately, with gold prices up more than 300% over the last decade, it is harder than ever. Just last December, fellow economists Martin Feldstein and Nouriel Roubini each penned op-eds bravely questioning bullish market sentiment, sensibly pointing out gold’s risks. Wouldn’t you know it? Since their articles appeared, the price of gold has moved up still further. Gold prices even hit a record-high $1,300 recently…’

The gold price has since spiked as high as $1900 in December 2011 and, after the mammoth crash in April, is again about $1400 (near £900).

Roubini’s After The Goldrush Comment

I have no polemic against Roubini and his conclusions on universal motivation to own gold in moderation as disaster insurance are consistent with my conclusions published in The Goldwatcher book, blog and elsewhere. But the logic, reliable information and clear communications that have characterised his analysis are absent in this anti gold fussilade that includes references to:

• the euro crisis that looked so menacing a year ago being seen now as almost solved by central bank money printing that can’t cause inflation;

• interest rates likely to rise and;

• Adverse supply and demand fundamentals for gold.

The State Of The Eurozone: Pretend and Extend

What’s actually happening in the eurozone doesn’t support Roubini’s uncharacteristically rosy assumptions on a smooth transition from train wreck to full steam ahead. Europe will be better described using his original terse phrase ‘pretend and extend’ until, at least, after the German elections in September when we may know the extent to which the regional superpower intends bankrolling fellow eurozone members. And, keep in mind, while Bernanke, Mario Draghi, Abe in Japan, The Bank of England and others have been cranking up the printing presses, they are engaged in a reflationary experiment that will be anathema to the Bundesbank.

Rising interest rates and the Bond Bubble

The US Bond market is valued at about $40 trillion. This suggests the global bond market is about $100 trillion and the value of all the gold in the world that can be traded may extend to 2% of the bond market. As interest rates rise and market values of bonds fall surely it’s the bond bubble we must fear more than the gold bubble. And, if we experience a bond market collapse, the chances are we will also experience some currency collapses with associated demand for gold as a currency hedge – something Japanese investors must be considering already.

Gold supply and demand

An off the cuff opinion from an economist, even one as respected as Nouriel Roubini, condensed into a few lines on a subject as complex as supply and demand for gold, can’t support an informed conclusion. Further, as the future is uncertain, supply and demand analysis must address the full range of scenarios.

Projections for demand for gold find support in the article by Kenneth Rogoff quoted above, as in his view (and mine)

‘ the most powerful argument to justify today’s high price of gold is the dramatic emergence of Asia, Latin America, and the Middle East into the global economy. As legions of new consumers gain purchasing power, demand inevitably rises, driving up the price of scarce commodities.’

I can also make a strong case on why I expect central banks will continue to use gold to hedge against both inflation and paper currency risks. And I can make an even stronger case on why they won’t be using spam.