07 Aug 2015

Gold Prices Prove Krugman Wrong

Gold, Krugman, Shameless Self-Promotion 42 Comments

My latest at Mises CA. An excerpt:

However, what happened since early 2014? Gold prices have bounced around in a tight zone, even though 20-year TIPS yields dropped almost a full percentage point. Back in early 2012, when the blue line was at a comparable level, gold prices were above $1,600. And in any event, Krugman’s baseline theory says that there should be a permanent upward drift in the price of the resource, as its exhaustible supply flows into difficult-to-recover uses (like dentistry). That means that if the interest rate comes back down in 2015 to where it was in 2012, then the spot price should be higher than it had been three years earlier–certainly not $400 (25%) lower.

42 Responses to “Gold Prices Prove Krugman Wrong”

  1. Bob Roddis says:

    My layman’s rule of thumb (having been an Austrian through the first gold boom and bust when some Austrians were predicting imminent economic collapse and hyper-inflation in 1983) is that gold will not zoom up in price during what are perceived to be good times with moderate inflation.

  2. LK says:

    At one point Austrians were talking about gold hitting $5,000 or even more. Strange how you don’t want to talk about that. And Austrians were not just wrong about gold. Have you forgotten the hysterical predictions of hyperinflation that have been proved wrong time and again?



    • E. Harding says:

      Aw, well, some people didn’t understand how QE worked. Big deal.

    • Major.Freedom says:

      Austrian economics does not make empirical predictions.

      Saying that “Austrian economists” predicted $5000 an ounce gold suggests that predicting the prices of commodities is a principle in Austrian economics.

      You might as well say “There are some black people who predicted $5000 an ounce”, it is just as bigoted.

      • LK says:

        “Austrian economics does not make empirical predictions.”

        Better break the news to Robert Murphy:

        Praxeology can make certain predictions about the future, but they are necessarily qualitative. For example, it can tell us that (other things equal) a fall in the demand for apples will lead to a lower price of apples.” (Murphy and Gabriel 2008: 47–48).

        You are an ignoramus, Major_Freedom.

        • Tel says:

          The meaning of the word “qualitative” is that you cannot predict $5000 an ounce (which would be quantitative).

          Just, you know, saying.

          • LK says:

            (1) M_F says that Austrian economics can make no predictions OF ANY KIND:

            “There are no predictions in Austrian economics. None. Zero. Nada. …. Austrian theory makes no predictions of what humans will learn and do in the future. In fact, it is precisely Austrianism that argues it is impossible.”

            He is a clown and utterly and bizarrely wrong, as we can see from this statement by Murphy. That is the point I making above.

            (2) regarding the $5000 prediction, yes, that is quantitative prediction, but this is a problem for YOUR side, not mine.

            It would seem that Austrians are so ignorant of their own theory that they go right ahead and make quantitative prediction all the time. But strange how when these predictions from people like Schiff or Ron Paul were made, no Austrians ever called out the others and said: “hey, you can’t make predictions like that in Austrian economics.”

            • Tel says:

              … regarding the $5000 prediction, yes, that is quantitative prediction, but this is a problem for YOUR side, not mine.

              I’m scratching my head about who exactly this is a problem for… or for that matter when it happened?!? You provide a link to the Peter Schiff video from new year’s end of 2014, start of 2015 but would you be so good as to point out the time into that video where the $5000 price comes into it?

              I did get the bit where Shiff said gold prices are set to “rise rapidly” but could not find his $5000 price prediction. Not in the video you provided at any rate.

              Searching on Youtube generally… elsewhere there’s a FOX news story (totally different video) where they do press Schiff on the $5000 per ounce prediction and he says, “Not by the end of this year”. I think he means 2015 there, but the screen had no date stamp showing. Without a doubt there will be some year where gold is at $5000 per ounce, the Fed guarantees that with their inflation target… but timing is everything. I think Schiff is right on that one, won’t happen this year.

    • Bob Murphy says:

      LK, you are so totally wrong in that particular blog post that it’s funny. Peter Schiff is clearly NOT predicting hyperinflation in 2015. In fact, he’s predicting that retailers will get caught with surplus stocks and will have to cut prices in December.

      Here’s what is going on:

      (1) The lady asks Schiff if he thinks the Fed will raise rates in 2015.

      (2) Schiff says no, he thinks it unlikely. He admits it’s possible they nudge rates up a quarter point or so, but then when economy tanks in response, they cut rates back down.

      (3) More generally, Schiff thinks the only thing that will FORCE Fed to raise rates, is when price inflation breaks out and then Fed has to raise rates to avoid hyperinflation. Schiff is clearly not predicting that that will happen in 2015.

      LK, your opponents are not nearly as stupid as you think. The fact that you so clearly misunderstood what Schiff was saying should make you step back and reevaluate how much other “evidence” you have similarly gotten 100% wrong.

      But, I’m guessing that won’t happen.

      • LK says:

        “More generally, Schiff thinks the only thing that will FORCE Fed to raise rates, is when price inflation breaks out and then Fed has to raise rates to avoid hyperinflation. Schiff is clearly not predicting that that will happen in 2015.”

        Even assuming your interpretation of that particular video is right, this man has been predicting hyperinflation for years. E.g., In this interview from April 21, 2008:

        “[sc. Interviewer]: What is your long-term, 20 year outlook on the health and durability of the American economy as a whole? Will the combination of new regulations, welfare liabilities and inflationary pressure create a prolonged recession similar to what Japan has undergone since the early ’90s?

        Peter [Schiff]: I am not sure. The road ahead will be filled with many potholes and include some important forks. Since I do not for sure which ones we will follow, I prefer to invest abroad until our path is more certain. As it stands now, we are headed to a hyperinflationary depression. I hope we will choose a different path before we actually get there.”
        Tim Swanson, “Interview with Peter Schiff,” Mises Economics Blog, April 21, 2008.

        Or here with Faber:


        The string of failed hyperinflation predictions by Austrians ought to embarrass you:


        • Bob Murphy says:

          LK it is downright freaky how you keep giving me stuff that does not live up to what you claim. You quote Schiff saying, in 2008, that his 20-year forecast includes hyperinflation, as your go-to example of his failed predictions. Do you have a time machine you’re not telling us about?

          • Bob Murphy says:

            And also, he says that that is where the US is headed, and he hopes they choose a different path before getting there.

          • LK says:

            The fact that it is within a 20 year forecast does not mean he didn’t think might happen in 2011, 2012, 2013, 2014, or 2015, and that clearly he was wrong.

            E.g., here he says in 2009 that if large deficits and QE continued (which they did for years) hyperinflation was “inevitable,” and that it might come in 2012, 2013 or 2014:


            That destroys your attempt to say it was only meant to be in “20 years time.”

            • Keshav Srinivasan says:

              Lord Keynes, assuming he did think that it *might* happen in those years, how does the fact that it didn’t happen refute him? It would be different if he thought it *would* happen in those years.

              • LK says:

                Keshav Srinivasan,

                You’re doing exactly what hordes of desperate Austrians have been doing: basically telling me that no Austrian ever made any prediction of hyperinflation, and basically denying that anything can be a prediction:


              • Keshav Srinivasan says:

                Lord Keynes, to be clear, I’m not making any claims about what the Austrians have said. I fully agree with you that they’ve made predictions which have been disproved.

                All I was saying is that your comment where you said Schiff predicted it “might” come wouldn’t be sufficient grounds to disprove him.

          • Tel says:

            You quote Schiff saying, in 2008, that his 20-year forecast includes hyperinflation, as your go-to example of his failed predictions.

            Not even that Bob. Schiff predicts that over the 20 year timescale the USA would get hyperinflation if no different path is chosen and by that he clearly means if the Fed sticks to ZIRP and refuses to raise rates.

            Fed getting serious about raising rates would certainly control price inflation, we know that because Volker did it.

            Schiff has explained many times that he doesn’t support the ZIRP and he thinks the Fed should be raising rates but they are nervous to prick the credit bubble. Price inflation will be their moment of truth when they have to face up to being between a rock and a hard place. The bit that Schiff doesn’t talk about is that when we hit that key decision, whoever is in the Whitehouse at that time is going to be tempted to insist that government gets to rollover their debt at low rates. That’s going to make life very difficult for the Fed chair on the day. Very difficult.

            I’m not about to predict which way it will go, personally I hope the Fed target stable prices because it’s really the least destructive thing they can do.

    • Ken P says:

      M1 has expanded dramatically, but credit has not.


  3. guest says:

    I’ve been wanting to share something about gold prices that should make Austrians feel better.

    The spot prices of gold and silver aren’t based on their physical supply, but on the supply of paper claims in the futures market:

    Supply and Demand in the Gold and Silver Futures Markets – Paul Craig Roberts and Dave Kranzler

    So, the spot price is definitely being manipulated.

    • Major.Freedom says:


      When you have a 10-fold increase in the paper claims to gold, of course “the price of gold” will be lower ceteris paribus.

      The falling “price of gold” could very well be the result of such high demand for gold that not only the demand for physical gold goes up, but the demand for claims to gold as well.

      • E. Harding says:

        Major, the strangeness here is that the price of gold didn’t rapidly fall when real interest rates rose in the past year, and wasn’t rising when real interest rates were falling between the beginning of 2014 and a year ago.

        • Major.Freedom says:

          Maybe our normal models of inferring real interest rates from nominal rates is flawed.

          • E. Harding says:

            Technically, TIPS yields are real rates, or the closest you can get to them in the real world.

            • Major.Freedom says:

              Not really, because the payments are not subject to market forces.

              Real rates are substantially higher.

              • Ben J says:


                Ive seen you say in the past that the inflation numbers probably understand actual inflation (if not due to outright manipulation, then because of public choice theory).

                But that is inconsistent with the idea that the real rates are higher than implied by TIPS (in fact it requires the opposite).

                So which is it? Are real rates high or low? Is inflation higher or lower than what the agencies say?

              • Ben J says:

                Excuse obvious typos.

                “understand” should be “understate”

                “the real rates” should be “real rates”

    • guest says:

      By the way, the big crash in gold prices was due to a big dump of paper gold, intended to entice others to sell:

      Gold Crush Started With 400 Ton Friday Forced Sale On COMEX

      “The gold futures markets opened in New York on Friday 12th April to a monumental 3.4 million ounces (100 tonnes) of gold selling of the June futures contract in what proved to be only an opening shot. The selling took gold to the technically very important level of $1540 which was not only the low of 2012, it was also seen by many as the level which confirmed the ongoing bull run which dates back to 2000. In many traders minds it stood as a formidable support level… the line in the sand.

      “Two hours later the initial selling, rumoured to have been routed through Merrill Lynch’s floor team, by a rather more significant blast when the floor was hit by a further 10 million ounces of selling (300 tonnes) over the following 30 minutes of trading. This was clearly not a case of disappointed longs leaving the market – it had the hallmarks of a concerted ‘short sale’, which by driving prices sharply lower in a display of ‘shock & awe’ – would seek to gain further momentum by prompting others to also sell as their positions as they hit their maximum acceptable losses or so-called ‘stopped-out’ in market parlance – probably hidden the unimpeachable (?) $1540 level.”

  4. E. Harding says:

    Here’s the scatter plot:
    Let’s try nominal interest rates!
    Hm. The real rate hypothesis looks more plausible, especially in the short-term. I don’t think Krugman is wrong on this one. What’s causing this specific instance of the gold price refusing to fall, I’m not quite sure, but it may be that falling oil prices don’t have any NGDP effect. 🙂

    • E. Harding says:

      Bah, ignore this comment. I thought it didn’t post because there was a power outage.

    • E. Harding says:

      Correlation of gold price with real rates: R2= .6852
      Correlation of gold price with nominal rates: R2= .6975
      I did not expect this!

  5. Tel says:

    If you accept the idea that gold is money, then people hold gold with the intention of later on buying something with it. However, if the material economy goes bad (perhaps due to malinvestment, or consuming our capital base, or just the end effect of lots of stupid regulations) then there will be less goods to buy, regardless of the type of money you are holding.

    • guest says:

      True. But then it won’t be savings that people need, immediately.

      Money is for saving, so you can, in a sense, “carry” more utility-value than that which you gave up for it over to the guy who is willing to take it in exchange for goods.

      As soon as people are able to satisfy their immediate needs, they will then be able to save again, and gold will become more attractive.

  6. E. Harding says:

    I think Krugman’s theory is doing pretty well in the long run. I suspect that it doesn’t work this time around because low oil prices have no (or positive) effect on NGDP, and it is NGDP that matters in determining gold prices more than inflation.
    Real interest rate v. gold price:
    Nominal interest rate v. gold price:

  7. E. Harding says:

    “They hear that the Fed is printing money, and it sounds to them like a violation of both the laws of economics and morality — and they surely think of it as a plot to take away their completely earned gains and give them to Those People (hence the whiteness issue).”
    -Krugman gets it precisely 180 degrees backwards. “Those People” in the Austrian/Pauline mind are not Blacks and Mestizos on welfare (How would they benefit from QE? Most of them don’t even save, much less invest!), but rich Jewish and WASP Wall Streeters who have gotten major boosts in asset values as a result of QE. Krugman is literally making stuff up. Of course, there’s nothing wrong with objecting with White people’s earned gains being given to Blacks and Mestizos on welfare.

  8. Innocent says:

    Gold, like money, like anything, is a commodity and the ‘value’ is based off of demand and perceived value.

    It can be the means of barter and is in many senses the oldest form of barter that has been recognized for thousands of years by people. However the medium can be and has been just about anything. For instance copper coins, oyster shells, or large round rocks.

    Obviously ( as has been pointed out ) the buying and selling of gold certificates even has its own markets ( which I find funny that you are buying and selling paper saying that you have gold )

    Anyway, price has to do with demand. The wise man looks at assets as a place to store his money until he can use it to create a means of production. I agree with buffet that gold is not a good investment – since gold in and of itself does not produce anything I would never consider it an ‘investment’ rather it is an asset which is the same as sitting on a pile of cash, there is no ‘investing’ involved ( Barring you are out mining – that would be an investment and the accumulation would be the fruit of the labor ).

    Anyway, you have things like this as a hedge against catastrophe, because a little goes a long way, and it is an easy asset to pick up and move from one location to another without being ‘obvious’ 1 pound of gold being worth even right now in excess of $16,000.00.

    Regardless I want the price to go down a little more before I purchase more of it. Because lets face it… it is qquite pricey.

    • E. Harding says:

      Of course asset holding is an investment. If it isn’t, what is it?
      Yeah, let’s wait until it hits $500, at least.

      • skylien says:

        Just Curious. Are you really believing it will fall to 500 at least?

        • E. Harding says:

          If real interest rates will skyrocket, the price of gold will surely fall. Do you believe real rates will go up to 4-5% at a sustainable rate someday?

          • skylien says:

            If and when I think you are right. However a lot can happen until we get to that point, and why didn’t they revert back already in 2010 or 2011? Why are they still that low?

            It is because the capital (price) structure is completely f****ed up. They didn’t allow to weed out mal-investments and even made it worse by pushing interest rates even lower.

            You tell me that if real rates rise to 4-5% that this will have an impact on the price of gold. Yes of course but the rest of the economy will notice an impact too, and the rest of the economy is used to low real interest rates by now.

            Many people I know (now in the age of looking for a house to own) buy houses now, and mostly I cannot talk them out of it. Prices rose a lot already and they are more or less maximizing their current possibilities to pay monthly credit rates. What do you think will happen to them if real rates go up to 4-5% while having huge debt loads and then at the same time a house that loses value, which means the bank will demand more securities? What happens with consumer spending if that happens? Or government bonds at 4-5%? Etc..

  9. E. Harding says:

    Guys, what is going on?
    The image doesn’t seem to be clickable.

  10. Nestor Mcnertney says:

    To prove that outrageous point, he focused on the times when gold s price declined, without a long-term perspective to show that gold has far outperformed stocks, bonds, the U.S. He then said, The modern world s closest equivalent to the classical gold standard is the euro, which puts European countries back under more or less the same constraints they faced when gold ruled.

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