This really makes no sense. As everybody knows, gold just had the biggest one-day drop in three decades. Here’s Krugman’s reaction:
So, the slide in gold has turned into a rout. As Joe Weisenthal says, this should be seen as really good news, because it offers strong evidence that the goldbug/inflationista view of the world — which says that we need to stop all efforts at monetary and fiscal stimulus lest we turn into Weimar — is, in fact, all wrong.
Maybe, just maybe, the gold crash will finally bring intellectual capitulation. But I wouldn’t bet on it.
OK how would an inflationista explain the movements in the price of gold? He’d say it was connected with Bernanke’s wild money printing, right? So what would you expect the price of gold to do, if that theory were right?
Well, when the Fed announced a major new initiative, like QE3, you’d expect gold to shoot up. And then when the minutes came out from a Fed meeting saying they had discussed stopping asset purchases this year, you’d expect the price of gold to tumble.
And that’s exactly what happened, as even Bloomberg framed it: “On April 12, gold slumped into a bear market on concern that Cyprus may sell bullion holdings to cover a bailout, and the Federal Reserve signaled that that U.S. monetary stimulus may be scaled back this year.”
Here’s the price of gold over the last 5 years:
So even with the recent drop, it’s still up about 75% from when the Fed really kicked in with quantitative easing. You can see it zoomed up around September 2012, which was when QE3 was announced. I’m getting ready for a trip, but you guys can check and see if the timing of QE2 works also.
In contrast, what was Krugman’s theory about gold prices? Well for the first few years of the crisis, he just said ‘volatility, who the heck knows.’ (That’s a paraphrase, not an exact quote, but that’s really what he said.) Then, he blamed it on Glenn Beck (really). Finally, he was relieved when somebody suggested it was due to very low real interest rates, because then Krugman could finally give a wise, elegant model to explain why the goldbugs were confused (focusing on the Fed’s asset purchases as the trigger, instead of the falling real interest rates).
Now since Krugman congratulates himself for his willingness to admit when his model is wrong, somebody should let him know that rates across the entire yield curve slightly fell over the recent drop in gold. (Same for real yields.) This goes in the wrong direction, according to Krugman’s model. In other words, falling interest rates should mean gold prices go up. (NOTE: That link to the Treasury yield curve data isn’t time-stamped, so it will be obsolete soon after this post runs.)
So there you have it: The qualitative movements in the gold price generally fit the “goldbug, crazy Bernanke” story, including the fact that gold is still way up from its level pre-crisis. In contrast, Krugman’s own model of gold prices doesn’t even go in the right direction for the recent crash.
Look, no simple model is going to explain every zig and zag of the price of gold, and obviously I don’t endorse a long-term rational expectations approach to commodity prices; of course there are bubbles and busts possible in any asset class. (I’m also aware of speculation about rigging the market, but I just don’t know enough to comment on these claims.)
My simple point is, once again, Krugman is running a victory lap for data that generally match his opponents’ worldview, but are completely at odds with his own. Isn’t that weird?