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Buy gold at these prices? Two views

November 3, 2009 |  6:00 am

Gold, which hit a record high of $1,072 an ounce in mid-October, made a run at that level in Asian trading on Tuesday, reaching $1,066.90 an ounce before pulling back.

The metal had jumped $13.70 to $1,053.40 in New York trading on Monday as its bitter rival, the U.S. dollar, slipped after rallying on Friday. UPDATE at 10 a.m. PST: Gold has reached a new high of $1,085 an ounce in New York.

Goldbarss Would you buy gold at these prices, after nine straight years of gains? And if so, what’s your motivation? Inflation? Deflation? Fear of global pandemonium?

Two Wall Street figures now well-known for warning of the financial mayhem of a year ago -- hedge fund manager David Einhorn of Greenlight Capital, and New York University Economics Prof. Nouriel Roubini -- have two very different views of gold, at least in the near term.

Einhorn, who began buying the metal itself and shares of gold-mining firms after the financial crisis unfolded last year, said in a speech last month that he’s still big on gold as an insurance policy and as an alternative to major currencies and "cash" accounts.

From the speech (link from

"I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker’s austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked.

"Prospectively, gold should do fine unless our leaders implement much greater fiscal and monetary restraint than appears likely. Of course, gold should do very well if there is a sovereign debt default or currency crisis.

"When I watch Chairman Bernanke, Secretary Geithner and Mr. Summers on TV, read speeches written by the Fed Governors, observe the 'stimulus' black hole, and think about our short-termism and lack of fiscal discipline and political will, my instinct is to want to short the dollar. But then I look at the other major currencies. The euro, the yen, and the British pound might be worse.

"So, I conclude that picking one these currencies is like choosing my favorite dental procedure. And I decide holding gold is better than holding cash, especially now, where both earn no yield."

By contrast, Roubini thinks that anyone expecting significant appreciation in gold soon from this point is dreaming.

From an interview Roubini gave last month with

"I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10% in all the advanced economies. So there’s no inflation, and there’s not going to be for the time being.

"The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30% unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon."

Who makes the more convincing argument?

-- Tom Petruno

Photo credit: Frantzesco Kangaris / Bloomberg News