Comments on: The gold price tells us nothing about inflation

By: safiya

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By: TFF

TFF — Sat, 07 Apr 2012 23:57:50 +0000

@ckbryant, on one level what you say is obviously correct. But on another level, people are investing a greater percentage of their assets in gold than before. Do you have a better way to describe this?

@Mjturner, that “riskless profit” is only a profit if a dollar tomorrow is worth the same as a dollar today.

But I agree that there is no evidence that the markets are anticipating rapid inflation — at least not as measured by the Treasury/TIPS spread.

By: mjturner

mjturner — Fri, 06 Apr 2012 19:26:07 +0000

djiddish98 – think it through. If the gold futures price was double the spot price, you could easily sell gold forward, buy spot gold, store it in a vault at a cost of less than 0.5% pa, and wait until the delivery date and make a riskless profit. So the spot price is, essentially, the futures price.

By: ckbryant

ckbryant — Fri, 06 Apr 2012 18:42:05 +0000

“Gold prices have risen because more money has flowed into that asset than has been removed from it.”

EXACTLY as much money has flowed out of gold as has flowed into it. Always. Full stop. Let’s get the accounting identities right as a first step, yeah?

By: sewells1951

sewells1951 — Fri, 06 Apr 2012 17:07:10 +0000

And, it could be that the sovereign debt loads in the western world concern many the folk who are invested in sovereign debt are simply wrong, like the people, pensions, hedge funds and other financial institutions who invested in mortgages were. If that’s the case, then gold may be priced very much on the low side at present.

My point here is that I think people, all over the world, are increasing their exposure to gold as a hedge against the debt profligacy of the sovereigns. If it works out the way they think it might, they will be wrong right up until they aren’t, sort of like the folk who were shorting mortgage backed securities a few years ago were.

By: EdwardCate

EdwardCate — Thu, 05 Apr 2012 16:11:55 +0000

If one graduated from a university in the last 40 years, you may want to read “Crisis in Competence” published by the National Association of Scholars.

The “dollar value” of gold is how many piece of paper some figure they’d trade for an ounce. The “value” of holding gold is that there are no counter-party promise being relied upon, and that’s highly important during times when many high-level folks aren’t keeping their promises.

“I am more concerned with the return of my money than the return on my money.” Will Rogers, quoted in Will Rogers Performer, p. 292. Also attributed to Mark Twain.

By: MrRFox

MrRFox — Thu, 05 Apr 2012 14:34:37 +0000

“Gold isn’t a store of value. It’s a shiny metal.
They are as much a store of value as tulips were during that mania.” (Posted by petertemplar)

Yes, gold’s worth is based purely on psychology, not utility in any economic sense; there’s inherent risk in that – and has been for the 3000+ years that gold has overcome that risk. Chances are it will continue to do so for at least another hundred years – who cares what happens after that?

Sometimes the obvious answer is the right one: the Treasury/gold anomaly isn’t really that at all – people and governments have fled to Treasuries out of, respectively, fear and lack of an alternative, and simultaneously to gold because of fear and greed. Fear influences investing like never before in my lifetime – and I’m not young.

By: TFF

TFF — Thu, 05 Apr 2012 13:54:13 +0000

Felix, why are you comparing the PRICE of gold with the YIELD of bonds? Shouldn’t you compare price and price (assuming reinvestment of interest)? Or yield and yield?

Of course that latter would be pretty boring, since the yield on gold is zero (or negative)…

Real interest rates are very low (negative) right now, so those low bond yields may imply significant expected inflation.

By: petertemplar

petertemplar — Thu, 05 Apr 2012 13:54:05 +0000

Gold isn’t a store of value. It’s a shiny metal.

They are as much a store of value as tulips were during that mania.

By: unclepie

unclepie — Thu, 05 Apr 2012 13:22:07 +0000

Long term interest rates in 1950 were about the same as they are today, but if you had purchased a 30 year government bond due in 1980, the paper dollars you got back in 1980 had a fraction of the purchasing power they had when you “invested” them in 1950.
Not a good deal.

From 1792 to 1933 ten US dollars would buy about 1/2 ounce of gold, and you could exchange a $10 bill for a $10 gold piece at any bank. Today, ten US dollars will buy about 1/5th of a gram of gold, which is about the size of a finger nail clipping from your little finger. If you were holding 1/5th of a gram of gold in the palm of your hand and sneezed, it would probably be gone forever.

By: djiddish98

djiddish98 — Thu, 05 Apr 2012 12:11:18 +0000

My question is why the gold futures curve doesn’t reflect the hyperinflation concerns that surround the asset.

A quick glance shows that there aren’t any concerns of a dollar collapse in the market.

By: tqft

tqft — Thu, 05 Apr 2012 10:01:33 +0000

Hasn’t the Fed had something to do with buying long term Treasuries with a goal of suppressing the yield?

By: Sechel

Sechel — Thu, 05 Apr 2012 09:53:55 +0000

Everything is about price Felix. What the dollar buys each year declines, this is one reason we expect a rate of interest when forgoing consumption and lending it out via savings. When the rate of interest is high, the loss of purchasing power is made up in part by the increased amount of dollars we get back and in such an environment gold may not be so attractive, but when that rate is lower or zero, then the only difference is the carrying cost or storage costs of gold. Gold is a store of value, that it does not pay interest in an environment of dollar deposits paying a negative real rate of return turns out to be a difference without a distinction. At the end of my time horizon I just want to know my purchasing power is maintained.

By: MrRFox

MrRFox — Thu, 05 Apr 2012 07:58:12 +0000

Gosh, Mr. S – you really rounded-off a lot of corners and skipped over more than a few of the moving parts in the equation of gold prices and Treasury yields.

“Why is the price of gold going up? Simple: (but incomplete answer appears in text)” (F.S.)

The really simple answer is that gold prices have risen because more money has flowed into that asset than has been removed from it; same is true of Treasuries – and oil – in varying degrees. Why?

Too complex to discuss in detail in a post, but in sum – in the interplay between fear and greed SWAG is perceived as a way to cover them both, by means of that single asset class. You seem to think the “fear” part of it is just phantoms and shadows and should be discounted all the way to 0 – others disagree. Others also disagree that the CPI is always the sole indicator of the extent of inflation, as the TIPS formula presumes it to be.

IDK who’s right; IMO nobody else does either – we’re all just guessing. Mr. Bishop seems to acknowledge that. Kinda hope you have it right, though – I’m 80% cash/20% realestate.