The gold price tells us nothing about inflation
Matthew Bishop and I have a fundamental disagreement when it comes to gold. There’s a “canary in a gold mine,” says Matthew: when the price of gold goes up, “it tells you we should worry about why it’s going up, and what it tells you about the value of paper currency.”
Whereas I think it tells you no such thing.
Essentially, we’re looking at two different things. Here’s a chart of the gold price, in green, versus the 30-year bond yield, in orange, over the past five years.
The long bond currently yields just 3.36%, which is the clearest way that the market knows of saying that there’s not going to be any nasty inflation in the future. If you want, you can even get an exact number, by subtracting the 30-year TIPS yield of 0.94%: the market is saying that over the next 30 years, inflation is going to work out at just 2.42%, on average. Which is not anything to get worried about.
Now TIPS are not a foolproof guide to future inflation, but gold certainly isn’t. Indeed, the bond market does more than undermine the gold price as a guide to future inflation: it actually provides a much more credible explanation for the gold price than an inchoate fear of future price increases. After all, if you want to protect yourself against inflation, you buy assets which throw off income which goes up when prices go up, like TIPS, or companies, in the form of stocks. Gold, on the other hand, throws off no income at all, and its price is just as crazy and volatile in real terms as it is in nominal terms.
And if you think that prices in the Treasury market represent an idiosyncratic flight to quality rather than a reliable guide to future inflation, then you can look at an even broader market indicator. As Peter Rudegeair notes, if you look at the $1.246 trillion in the 100 largest US corporate pension funds, more of it is invested in bonds than in stocks. And retail investors, too, are moving their money out of stock funds and into bond funds. Essentially, everywhere you look, the market is showing that it trusts the dollar and that it has no fear of inflation.
Of course, the market might be wrong. But Bishop isn’t telling us to mistrust the market, he’s telling us to trust the market — albeit just one tiny slice of it, in the form of the gold market. That’s silly. If you’re going to trust market signals, you should trust the big market signals which are sending a clear message, rather than the noisy and volatile ones which mean whatever you want them to mean.
Why is the price of gold going up? Simple: when interest rates are this low, bonds are increasingly unattractive as a source of yield, so you might as well just buy stuff — call it SWAG — instead. SWAG doesn’t have any yield, but then again, neither does cash, really. And when there aren’t attractive investments out there, then it becomes more attractive to spend money rather than to invest it. As a result, people spend their money on SWAG, and some of them even kid themselves while doing so that by buying their SWAG they’re making some kind of investment. They’re not. And they’re certainly not producing a reliable guide to the future status of the US dollar.