Gold and the Carry Trade: Rogers vs. Roubini, Who’s Right?

Recently there has been a war of words between two very well respected financial forecasters, Jim Rogers and Nouriel Roubini.  Roubini said that Jim Rogers call of gold going to $2,000 as being “utter nonsense.”

Jim Rogers is known for his book “Hot Commodities” and has called the commodities bull market pretty well except for a decline in prices last year.  He tells readers that on average commodity bull markets can last up to 18 years and that we’re currently in year 12.

Nouriel Roubini, Chairman of RGE Monitor’s Global Economic Outlook, is given credit for calling the most recent stock market crash back in 2006, but has not taken part in this latest bull market run since March 2009.

No one is perfect.  Not even these so called experts.

I myself have to admit missing one aspect to the short term gold trade of late.  If you have read my book, you know I am long term bullish on gold.  I did write an article not too long ago asking, “Is Gold Peaking?” I used the information I had at the time in coming to the conclusion that it might be.  I thought my conclusions were well thought out but also mentioned that those who have read my book, knew what they should do.  They care not that gold falls to $700 on its way to $2,000 or higher.

I’m spending quite a bit of time writing my book, “Fed Up!” as there are much bigger mountains to move than criticizing the financial industry on their lack of understanding about how gold needs to be part of everyone’s portfolio.  While spending time on this, I failed to analyze one piece of the gold puzzle and that is the U.S. dollar being the new “carry trade.”  This article makes up for that.

When I wrote my “Is Gold Peaking?” article gold was priced at $1,058.  It’s presently priced at $1,097.  I had mentioned in that article and others since that without the dollar index breaking down below its March 2008 low of just under 72, that there seemed to be some risk in the short term gold trade.  Gold had broken its March 2008 high of $1,033, but the Dollar Index wasn’t confirming that breakout. The dollar index is presently still north of 75.

Conservative Investing

I’m conservative when it comes to short term trading analysis.  If someone has made 10% on large investments in a short amount of time, then I’m ok with them selling at least half of their investment and locking in profit, and keeping a stop at the sell price on the other half.  With the remaining half, I recommend selling all the way up, always locking in more profit.

If someone has made over 30% on a smaller amount, them I’m ok with taking that kind of profit and leave some profit on the table.  My father, a retired commodities broker, used to always say that what kills a trader is “greed.”

When it comes to investing, being patient and waiting for the right setup is the key and also a conservative approach.  Buying at the highs of a trend offers more risk.  Right now, gold has broken to new highs for the short term trader, this trend will eventually reverse course.  It always does.

But what is fueling the current “short term” gold bull market if the dollar index as of yet hasn’t broken to a new low?

Once gold broke to a new all-time high it was easy to predict that there would be a run higher in price.  Any investment, when it breaks to a new high typically has a little more gas left in it before it reverses course in preparation for the next leg up.  The fact that the Dollar Index didn’t confirm the breakout in gold led me to be leery.

However, the Fed on Tuesday of this week left interest rates unchanged and also left the language that they will do so for an “extended time.”   This has confirmed that the carry trade is still on and the dollar index took a hit.

In this case, from a short term perspective, Jim Rogers is winning the game.  But is his call for $2,000 for gold a short term call or a long term one?  His own words tell us it is a longer term perspective.  He’s got another six years before this commodity bull market will end.  So for Roubini to jump all over him is illogical from a long term perspective.

Roubini Doesn’t Like Gold and Never Will

Roubini has never been a fan of gold that I’m aware of.  If you listened to his advice earlier this year, he called the top for gold on June 16th. So that’s twice he was wrong this year alone yet he’s always the star on CNBC.  Peter Schiff also called the stock market crash but he also predicted gold would go to new highs and it did.  Schiff though is mocked by the CNBC crowd.

Roubini also is calling for a U shaped recession but he’s already messed up on that analysis.  It will be more like a W shaped recession.  I don’t know why he doesn’t admit he was wrong as he just yesterday on CNBC is still calling for a U shaped recession.

So why does Roubini hate gold?  Because he’s a Keynesian Government loving professor at NYU and former advisor to the U.S. Treausry Department.  Show me a professor at a University that likes gold, outside of the Austrians, and I’ll listen to what they have to say.  Otherwise, remember where the professors bread is buttered.

Where Roubini Will Be Correct

But there is some aspect of truth in what Roubini says from a shorter term perspective.  That is, there will eventually be an unwinding of the carry trade.  When this happens, the dollar will appreciate versus gold.  We just don’t know when as the Fed is prolonging lower interest rates.

The Yen recently had been unwinding its carry trade.  You can see by the chart below that the price of gold in Yen did not rise over the last two years because of it.  But also note, the price of gold didn’t go lower and thus the purchasing power of gold, something Roubini doesn’t address, increased as the Yen appreciated in price.

The Yen in the chart below is represented by the blue line.  Notice that it has been virtually flat for the last two years.

So who is right, Roubini or Rogers?

In the long run, Rogers will be proven right.  Gold will trade over $2,000 an ounce.  Roubini, who favors government intervention in the markets, doesn’t understand that this intervention, added to the continued spending and future spending that government will do, is the eventual nail in the U.S. dollar coffin.There is no way that the U.S. can pay off its current debts and account for future debts except to inflate it away, especially with more and more spending.  Even just today, Fannie Mae asked for $15 billion more because of a loss.  Who didn’t see that coming?

For the short term, the carry trade is in play and an eventual unwinding will occur.  Without the 72 being broken on the Dollar Index, I’d still be cautious.  The Elliot Wave Theorists are predicting a dollar bounce in the near future as well.

But in the end, the comments made by Richard Russell years ago will come into fruition; “Inflate or Die.”  And by “Die” he means…the death of the dollar.  Until the U.S. government tightens the ships, you can bet the price of gold will go higher.  And at a minimum, as with the Yen, gold will hold its purchasing power with any dollar rise.


Go To Buy Gold And Silver Safely Store
About Doug Eberhardt

Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534


Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with capital you can’t afford to lose. This is neither a solicitation nor an offer to Purchase/Sell futures or options. No representation is being made that any account will or is likely to achieve gains or losses similar to those discussed in this outlook. The past track record of any trading system or methodology is not necessarily indicative of future results.

All trades, patterns, charts, systems, etc. discussed in this outlook and the product materials are for illustrative purposes only and not to be construed as specific advisory recommendations. All ideas and material presented are entirely those of the author.

No Comments

Leave a Comment

Your email address will not be published. Required fields are marked *