30 Oct 2008

Is Gold Going Up or Down?

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Michael Rozeff goes into the pit of lions to argue that gold is overvalued. (Really, look at how defensively written his article is. I bet he gets at least 25 LRC readers emailing him in outrage.)

Rozeff is a sharp guy, and (like him) I was surprised that the CPI figures apparently aren’t too bad for a long stretch of time. But even if gold right now is undervalued looking backwards–i.e. if gold has risen more than prices in general since a previous benchmark date–that doesn’t really mean too much. I think prices are going to go through the ceiling in the next few years, and take gold with them.

I know, I know, there are plenty of smart people pointing to M1, the Great Depression, blah blah. I have three things in response:

(1) Ben Bernanke believes that the Great Depression was caused by price deflation. So he will do whatever he can to inflate, thinking that he is saving us by doing so.

(2) You’re saying banks will just sit on the new money? Fine, the feds will borrow and spend it. And again, they will think they are doing a courageous, noble thing; here’s Barney Frank saying the government has to start spending, and concerns about the deficit need to take a back seat right now. Here’s Paul Krugman saying the same. So that’s the Fed chairman, the chairman of the House Financial Services Committee, and the most recent economics Nobel Laureate all proclaiming that more injections of money and debt are the way out of our current mess.

(3) My closing argument is the chart below. Yeah yeah, go ahead and talk about sterilization all you want. I am going to drop the PhD and naively say, “Duh, big money means big prices!”

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