The Big Picture - Macro Perspective on the Capital Markets, Economy, Technology, and Digital Media

A day after Bernanke testified in Congress that “we anticipate that inflation will remain low” due to “the slack in resource utilization”, “notwithstanding recent increases in the prices of oil and other commodities,” gold is just 2.6% off all time record highs. In fact, of the 19 commodities in the CRB index, it is the only one with just a single digit decline from its highs. Over the past few years the decline in the other 18 as of today off its recent highs range from 16% (coffee) to 73% (nickel and natural gas), thus gold has been king. This begs the question of why is this the case and whether gold is an inflation indicator or not and is Bernanke going to be wrong in his forecast. Bernanke apparently doesn’t believe gold is useful in gauging inflation expectations but his predecessor Greenspan did. Back in 1999, Greenspan said “I think the price of gold has, over the decades, been a generally usable indicator of what the level of inflation has been.” Years earlier he believed this to be the case because since all the gold ever produced still exists and incremental output may not substantially move prices, its price was a reasonably good indicator of inflation expectations. In the mid ’90s he said to a Congressman, “the price of gold reflects a basic desire to hold hard assets rather than currency.” We live in a fiat currency world and have since the gold standard ended in the early 1970’s, thus it is up to central banks to provide price stability and thus protect its currency. Currency debasement, in the name of providing liquidity and helping private markets, has been the unspoken policy for many central banks, particularly the Fed. In 2005 Greenspan said, “we recognize that excessive creation of liquidity creates inflation which, in turn, undermines economic growth.” I say to all who side with Bernanke’s forecast and those who believe more in the deflation case, don’t ignore the price of gold.