“Gold sets record high amid economic fears,” The Associated Press recently wrote. “Gold surges to record high,” CNN said. Gold closed Monday “at a record $1,402.80 per troy ounce,” the front page of The Wall Street Journal reported Tuesday.
It’s a good story. Unfortunately, it’s not true, at least not in any meaningful sense.
Gold is at a record only if you fail to adjust for inflation. And you should almost always adjust for inflation. Otherwise, you end up with a series of meaningless records — Gold reaches record high! Oil reaches record high! Lettuce reaches record high! — that depend on the fact that a dollar in 2010 does not have the same value as a dollar did in, say, 1980.
More than a month ago, Ryan Chittum of The Columbia Journalism Review noticed the epidemic of supposed gold records and urged those of us in the media to stop. As he explained, the actual record was set 30 years ago, when the price of gold, in today’s dollars, hit $2,318 — or 65 percent higher than it closed on Monday.
This isn’t simply a question of math. Anyone who says gold is at a record high (or who said oil was several years ago) is getting the story wrong. Why? Because $10 today is not more valuable than $9 a few decades ago. Claiming otherwise is tantamount to saying that 10 rupees is more valuable than $9 because 10 is a bigger number than 9.
The notion that gold is more expensive than ever happens to fit with a larger narrative that also does not square with the facts — namely, that inflation is an imminent threat. This can be a bit confusing, I realize, because inflation plays two roles in the story: past inflation distorts our view of record highs, while future inflation is the concern of some of those people making a big deal out of gold.
But the story itself is fairly straightforward. In the last week, both foreign governments and some economists in this country have criticized the Federal Reserve for announcing that it would try to reduce long-term interest rates. The foreign governments, especially China, Russia and Germany, say the move is an attempt to bring down the value of the dollar. Inflation worriers in the United States say that the Fed can’t keep rates low forever and eventually must wind down its emergency responses to the financial crisis.
On narrow grounds, both groups of critics have a point. The Fed’s move will indeed bring down the dollar. And the Fed cannot continue its aggressive policies forever. But forever is a long way off. Right now, the unemployment rate remains near a 30-year high, and inflation is just 1.1 percent, compared with 2.7 percent when the year began. Meanwhile, the United States is running a large trade deficit with China, Russia and Germany, among other countries.
In this situation, the Fed should absolutely be trying to lift economic growth and employment by reducing the cost of borrowing money. Its mistake, in fact, was waiting so long to do so, even though the recovery began losing momentum in the spring. That the Fed’s move is also likely to bring down the dollar — lowering the cost of American exports, raising the cost of imports into this country and thus reducing some of the world’s trade imbalances — is an added benefit.
Remember, the Fed has a dual mandate: maximum employment and stable prices. The country is about nine million jobs shy of full employment today, at the same time that prices are clearly stable. Not only has inflation itself fallen, but people’s expectations of future inflation — an important indicator to the Fed — have fallen over the last year, according to surveys by the University of Michigan.
And what evidence is there that consumers are wrong and inflation is about to become a problem?
Well, borrowing rates for the federal government remain exceedingly low, so bond investors don’t seem concerned. That leaves gold.
Its price has certainly been rising. It began doing so a decade ago, around the same time that oil prices began rising. Both had fallen sharply in the 1980s and 1990s, but they began to increase around 2000, partly because rapid economic growth in Asia was lifting demand for all sorts of commodities.
When the financial crisis occurred in 2008, oil and gold both fell, although gold’s fall was milder and it soon began rising again. Over the last two years, it has nearly doubled in price. To a lot of people — from Glenn Beck to George Soros, and many in between — gold is a refuge in uncertain economic times. No matter what, it will always retain at least some of its value.
But gold is hardly a perfect predictor of inflation. Consider the second half of 1982, when gold jumped even as inflation was falling. Inflation would continue to fall for most of the next 20 years. From 2000 to 2008, gold nearly tripled in price, while inflation was largely quiet.
The recent rise, as Nariman Behravesh of the research firm IHS Global Insight notes, has relatively little to do with inflation fears. “It’s not about inflation,” he said. “It’s a hedge against a weak dollar, not a hedge against inflation.”
Investors who hold a large amount of dollars — including central banks like China’s — understand that the dollar probably needs to fall in coming years, as today’s trade imbalances slowly shrink. So many of those investors are turning to gold.
If investors really were worried about inflation, gold would probably be a lot more expensive than it is. Who knows? It might even hit a record high.
Source: DAVID LEONHARDT