Thursday, November 11, 2010

Have I Been Wrong About The Price And Role Of Gold?

The short answer is yes regarding the price of gold, although I think I avoided making my most incorrect predictions public on this or other blogs. I continue to think that gold is experiencing a bubble (more below on that), while having to admit that at least some of my private forecasts incorrectly put too low a ceiling on the possible price of gold. I privately said it could go to $1300 an ounce, but was skeptical of much above that, and have said to several folks that it could not hit $2000. While I still think it is a bubble, and that a return to a gold standard would be a disaster (even if "watching gold" while not taking it too seriously may not be completely stupid for policymakers as Robert Zoellick appears to be calling for), the bubble can go higher, especially with the Chinese and Indian central banks buying it, as they are reportedly doing. Evidence here is that in the last gold bubble 30 years ago, it hit a current real price of about $2387 an ounce according to some sources before it crashed hard and stayed down for over two decades.

But is it a bubble? Well, some of the evidence is in the publicity, all those people yelling that it cannot go down, which is generally one of the surest signs of something being a bubble. There is also the problem that gold is usually best bought as an inflation hedge, as it was in the 1970s, but that despite some people shrieking loudly about possible hyperinflation, the market evidence is that inflation expectations have only risen modestly with the QEII. On this, and on the matter of the gold standard and commodity prices in general, see the last three posts by Jim Hamilton and Menzie Chinn at Econbrowser, Chinn notes that the five year TIPS spread has moved a whopping 0.4% upwards, from 1.2% to about 1.6%, hardly an outbreak of hyperinflation, even if I do not buy into rational expectations (thus granting that the TIPS market can be more than stochastically wrong, or may even be being manipulated, as reportedly the Fed holds something like 10% of the TIPS bonds out there, although have not heard of any changes in that proportion recently).

Regarding the broader path of commodity prices, Hamilton worries about this, focusing not on gold but on his old fave, oil, arguing that we may be in trouble if it goes noticeably above $90 per barrel, which we are unpleasantly near. He also notes a sharp increase in the correlation between various commodity prices recently, particularly starting in 2009. However, I must note that a non-trivial portion of the runup in the price of gold occurred prior to then, so that even if quite a few commodities have risen more sharply since then, supposed evidence against the bubble hypothesis put forward by some commentators, it is still much higher relative to most of them than was the case if one goes back somewhat further in years. So, yes, Virginia, there is a bubble in gold, but it could still go some ways up further before we see it crash.


Josh said...

hot money hasnt even begun to enter the gold market. when people start to lever up to take gold positions, then we'll talk. in the meantime, the dollar is in a bubble. Bernanke is printing like crazy buying treasuries, with no backing to his digital dollars, just a devaluation of the USD to buy the USD (and US debt).

the dollar isn't the bubble shooting to high, its a hedge against the USD falling off a cliff, and Bernanke isn't taking his foot off the gas

Josh said...

EDIT: "GOLD isn't the bubble shooting to high, its a hedge against the USD falling off a cliff, and Bernanke isn't taking his foot off the gas said...


Actually, the dollar has been up in recent days against the euro because of the threat of an Irish default, a threat that does not seem to be lessening. As it is, Bernanke and crew want the dollar to go lower, and the foreigners complaining about QEII are complaining that lowering the value of the dollar is what it is intended to do, and given the chronic current account deficits of the US, the dollar should be lower, but those parties, especially China and Germany, are whining that they may find it harder to export to us if QEII successfully lowers the value of the dollar, which so far it is not doing so much against the euro thanks to the scarier to financial markets Irish situation.

TheTrucker said...

There is an horrendous GLUT of money in this world. Far, far more than is needed to transact business and provide a store for retirement. All of that money simply GIVEN to the financiers all over the world is now seeking a safe harbor. There are safe harbors in gold and copper and oil until the bottom falls out of the world economy again due to oil prices. The currencies need to be devalued and I'm happy to see the US FED leading the charge. Hoarding gold will work for a while. But people don't actually need gold. They need a way to earn income that allows them to have medical care and invest in their retirement by buying a home. But all of that means little to the gamblers who want to have all the money in order to command the labor of others.

Anonymous said...


Gold is going up because the underlying real economy is still contracting. Gold is no ordinary commodity; it is a commodity money, and the purchasing power of commodity money rises during depressions like the one we have been in since 2001.

2001 -- not 2008 or some other silly date. During this depression, we have had two monetary recessions as well.

Gold performance is not related to QE, QE2, or QE(n) -- the rise began long before the words entered our national lexicon as a topic of daily converstation -- to the tune of about 16 percent a year since 2001.

Before that, the real economy was in its expansionary phase, roughly from 1980-2000. During that period, gold prices fell.

Gold rose through the 1970s when we were also in a depression -- after the collapse of Bretton Woods.

This pattern of behavior has been noted since the mid-19th Century, at least by Karl Marx. However, since the economy was on the gold standard, the rise in the purchasing power of gold was accompanied by hording, as money fell out of circulation.

With the debased fiat currency we use for gold today this no longer occurs. Instead, rather than money falling out of circulation, the price of gold rises, or, what is the same thing, the purchasing power of gold, denominated in debased fiat currency, rises.

TheTrucker said...

Gold was money because the king's men would take _IT_ as opposed to taking yer' chickens. Money is a creature of law and gold is a commodity.