23 Sep 2011

Markets More Complicated Than Keynesians Or Austrians Said

Economics, Gold 22 Comments

I’m having trouble getting real-time quotes, since I’m now in Slovakia and Google keeps “helping” by switching to some weirdo site. But assuming the trends are the same today as they were yesterday, gold is getting crushed, while both nominal and TIPS Treasury yields are down too.

On the face of it, that means neither Krugman nor I know anything about gold prices. Since real yields have gone down (the 30-year TIPS dropped from 1.10% to .87% in the last week, as of yesterday), Krugman’s new, chic model that has the blogosphere in a tizzy, says that gold should have gone up.

Strictly speaking, at least as of yesterday “the market’s” expectations about future price inflation have dropped, so I could be a jerk and claim victory. However, I’ll be honest and say that if you had asked me, “People are freaking out and think the euro might collapse any day, do you think gold will plummet?” I would have said no. (I would have allowed that it would go down, but I’m surprised by how much.)

Of course, I think most analysts would say–and I have no problem with this conventional explanation–that we are witnessing a huge flight into liquidity, meaning that TIPS are at a relative disadvantage to regular Treasurys, and that some firms that were long gold might be selling in order to meet margin calls etc. But my point is, markets are really complicated, and whenever anybody–Keynesian or Austrian–comes up with a model based on “the” factor that drives a particular price, eventually that model will blow up in your face.

22 Responses to “Markets More Complicated Than Keynesians Or Austrians Said”

  1. Martin says:

    Isn’t this simply a case of the dollar strengthening against the euro?


    Assuming that the choke price is in real terms and that gold is bought and sold in USD, then a rise of the USD should lead to people switching out of Gold. This effect could dominate the drop in the real rate.

    I know, not exactly the strongest of explanations, but I noticed this when people were talking here (Netherlands) about the price of Gold dropping and they showed a chart of the Gold price in USD when the EUR was plunging simultaneously. The plunge seemed to be about the same size.

    Anyhow, enjoy Bratislava 😉

    • Brian Shelley says:

      Since Aug. 29th, gold is down 9%. The euro is down 9%. However, real rates dropped about 50 bps on 30yr and 25 on 10yr rates. Inflation expectations in the gold market had to have changed.

  2. Brian Shelley says:

    If you had read my long winded expansion of Krugman’s model in your comments you would understand why gold went down. When the Fed came out with “just” Operation Twist, the market was expecting QE3 (or something inflationist like it). The market did not get what it wanted. Equities plunged, but so did gold plunged too. Without QE3, gold market expectations for both inflation and dollar weakness went down, thus gold went down.

    • Tel says:

      But if it was previous inflationary expectations that drove up gold price, and now the lack or QE3 (and thus lack of inflationary policy) is spoiling those inflationary expectations… Austrian theory would also predict a falling gold price.

      Personally, I still expect QE3 before too much longer, the twist thing didn’t really fool anyone, and the intrinsics of the US economy and debt position have not changed. Strangely, gold has not fallen in price (as measured in Australian Dollars) but BHP has indeed fallen in price. I read articles like this one:


      Why would Italy be driving BHP prices? It makes no sense to me.

  3. Bob Murphy says:

    Brian, like I said in the post, I think strictly speaking this episode makes me look better than Krugman. But I am being honest that I’m surprised by how bad a beating gold has taken. One of the things I said in my article is that my own view can explain why panics send people into gold, whereas Krugman’s model can’t. So, it would be a bit cheeky for me to cite the current thing as a feather in my cap.

    • Brian Shelley says:

      Krugman’s model is silly, I’ll agree with you. I do think, though, that if you take his model and run with it, you get something that doesn’t violate the Austrian viewpoint. His simple model assumes that gold, in “real terms” over time, never changes in value. Only the PV does. Have we not won?

      • Joseph Fetz says:


        Are you saying (or, saying that Krugman is saying) that gold keeps its relative value over time, that the dollar can be stably measured using gold? And, that at times, its price (gold) swings above or below this point in shorter durations?

        • Brian Shelley says:

          Yes, I say that the world price of gold never changes. Krugman seems to imply this by claiming that gold is a long-term zero bond with a PV face that fluctuates with real interest rates. That is, the expected future price, adjusted for inflation, really doesn’t fluctuate enough to even include in his model.

          • Martin says:

            I don’t think that is entirely true. The ‘choke price’ Krugman refers to is the price for which the demand for gold would be zero.

            Modelling it as a long term zero bond is assuming that the demand curve for gold does not change. The choke price however does change: see the rise of China.

            The price of gold in the model popularized now by Krugman is contingent on the choke price and the real rate.

  4. MamMoTh says:

    Are you there to play in Hostel 3? I knew your face looked familiar…

  5. James E. Miller says:

    Don’t feel bad Bob, CME called the cops on the party:

    China slowly imploding might have something to with it as well:

  6. Secret Agent says:

    Gold, silver, and other precious metals are down because of a CME margin hike:


    • Maurizio says:

      so it’s just a coincidence that gold is down at the same time that everything else (stocks, commodities) are down?

  7. Gee says:

    Worth pointing out that Mish warned of a gold dip on Monday when it was trading at 1776, now at 1656.

    • Dan says:

      It’s worth pointing out that Brandon Inge is now hitting above the Mendoza line.

    • Robert Fellner says:


      I shudder to think of how terrible a forecaster this “Mish” must be if you used that blog post where he writes, “I expect gold to hold up in a major decline” as an example of him predicting the massive plummet in gold.

      • Gee says:

        “I expect gold to hold up in a major decline, but I could easily be wrong.”

        I took “but I could easily be wrong” as meaning it could go either way. But maybe I’m just a little too over-enamored with my golden boy, as they say (but then again I’ve got a crush on Bob Murphy too but not so crazy about his predictions). Also Mish has said that gold goes up during a deflationary decline because there is the expectation that the Fed will attempt to inflate, and the Fed just so happened to crush those expectations with Operation Twist.

        • Robert Fellner says:

          I took “but I could easily be wrong” as meaning it could go either way.

          Really not much of a prediction to say gold could “go either way”, is it?

  8. PVW says:

    Your description of the google problem might perhaps be a virus. The TDSS / google redirect virus can cause you to get sent involuntarily to weirdo web pages.

  9. Captain Anarchy says:

    That’s it! I’m converting to the church of MMT.

    • MamMoTh says:

      What’s wrong with Austrian Scientology?