Roubini: There's tech bubble, crypto bubble, Robinhood bubble, 'I would be slightly overweight gold' right now

New York (May 12)  How safe is the stock market rally, and what would a serious correction look like? With many bubbles popping up in the financial markets, gold is one of the investments it's good to be overweight in right now, said Nouriel Roubini, CEO of Roubini Macro Associates and professor at the NYU Stern School of Business.

"There was a corporate debt explosion before this crisis, and now there is even a greater buildup of corporate debt of very poor quality. We have the tech bubble, we have the crypto bubble, we have the Robinhood and day-trading and the GameStop bubble," Roubini told Michelle Makori, Kitco's editor-in-chief. "All of this suggests the markets are frothy if not an outright bubble and therefore the risk of a correction is rising over time because valuations are stretched."

Roubini pointed out that there are a number of triggers that could kick off a significant correction in the U.S. equity market, including a persistent rise in inflation, a taper tantrum if the Fed starts to tighten, and a downside growth surprise.

"What if we were to have the spread of one of the variants that is resistant to the current vaccines? Even the U.S. could be at risk," he said.

All of the above could lead to a risk-off event, especially given that market valuations are priced for perfection, noted Roubini. This means that the stock market is priced for a goldilocks scenario, where growth will be strong, inflation will remain low, and the Fed is still going to hold. "Any one of these other shocks could lead to a correction," he explained.

And this is where the conversation about gold comes in. "Gold went all the way to $2,000 last summer and corrected by 15%. It started to weaken when long rates were rising not only in nominal terms but also in real terms. It started to weaken also because there was a period where the dollar was strengthening rather than weakening," Roubini said.

However, there was a shift in the last couple of months, with the price starting to go higher. At the time of writing, June Comex gold futures were trading comfortably above the key psychological level of $1,800.

When asked about his outlook on gold, Roubini pointed to a gradual rise in prices, adding that he would rather be slightly overweight in gold in the current macro environment.

"Given the trend of monetizing fiscal deficit, gradually rising inflation, social-political problems, geopolitical problems, the gradual weakening of the value of the U.S. dollar, and potentially other risk-off episodes, I would be slightly overweight in my portfolio into gold assets," he stated. "We had COVID-19, but there will be other risk-off episodes where there is a correction of U.S. and global equities when gold is then a safe asset."

He continued: "My medium-term outlook for gold is for prices to go gradually higher. Why? If I am right and live in a world where we will continue to have monetized fiscal deficits, we'll have these negative supply shocks that feed in inflation and stagflation. Then gold prices have to go higher because they are a good hedge against inflation and debasement of fiat currency."

Roubini explained that he sees the dollar's value weakening over time, which is a tailwind for gold due to its inverse relationship to the greenback.

"We have very large twin fiscal and current account deficits. And because of the fiscal stimulus, our current account deficit will become even larger over time," he said. "Structurally, the dollar has to weaken. In the past, when the Fed was raising rates, there was enough capital inflow to keep the dollar strong. But now that the Fed is at zero and doing QE as far as the eye could see, the capital account is not going to provide enough inflow to sustain the dollar."

The greenback is also at risk because the U.S. uses it as a foreign policy tool, where certain strategic rivals such as Iran, North Korea, China, and Russia are punished, Roubini pointed out.

This has set off a global move away from the U.S. dollar positioning gold as a perfect substitute for countries like China and Russia because the U.S. cannot seize the precious metal, he added.

"The central banks have large stocks of the U.S. dollar assets, and they have to gradually reduce these assets. If China goes from the dollar into RMB, their currency appreciates. They don't want to do that. If they go into euro and yen, they increase the value of the euro and yen and create trade friction with Japan and Europe. Where are they going to go? Into something that cannot be seized by the U.S. and that is gold," he said. "And that diversification from Treasuries into gold by central banks has already started. That's why gold went up by 60% between 2018 and the middle of last year. And the trend of the U.S. using the dollar as a tool of foreign policy and of weaponizing it will eventually weaken the dollar and gradually increase the price of gold."

When asked about whether bitcoin poses a real threat to gold, Roubini responded that the cryptocurrency is not a stable store of value.

"Calling bitcoin a currency is a misnomer because it is not a unit of account, it is not scalable means of payment, it is not a stable store of value," he said.

Bitcoin does not look like an asset either. "Stocks give you a dividend, bonds give you coupon, loans give you interest, real estate gives you rent or housing services. Gold doesn't have income, but it has uses in industry. It has utility because it has been used as jewelry for thousands of years. It has been a stable store of value whenever there is inflation, deflation, financial crisis, geopolitical problems," he noted.

But bitcoin does not have any income, it does not have any uses, it is not a stable store value, and it does not have utility, Roubini added.

"The idea that bitcoin is a digital gold does not make sense. Whenever there is a risk-off episode, bitcoin falls more than other risky assets. When we had the shock of February-March of last year when COVID started, U.S. equities were down 35%, bitcoin was down 50%, and other top ten cryptocurrencies were down 60%. So they are not even a hedge against risk-off episodes," he said.

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