The price of gold is up sharply and so is the chatter about inflation, debt, and the demise of Western Civilization. At a time when the critical global economic issue is unbalanced growth, the golden chatter ignores gold’s price in real dollars versus gold’s nominal price in yen, euros, and sterling. If the U.S. is coming apart at the seams, how come the real dollar price of gold is only 66% of the 1980 peak? Why does the yen today buy as much gold as the dollar does and also as much as the dollar did in 1980? Gold costs less for Europe than it does for Japan or the U.S., fair enough, but gold also costs Europe 1.5 times more than it did when gold peaked globally in 1980.
An intelligent conversation about gold is tough to come by because there is nothing like high gold and a low dollar to raise a politician's patriotic fervor to a fevered pitch and reduce the front pages to partisan diatribe. Even the Financial Times felt the need to join the fray. Today’s front page showcased an article on the dollar, gold and Obama’s political problems from all of it by quoting no less of an important voice than the erudite Alaskan Sarah Palin from her Facebook page --
[she] . . . sought to link the dollar decline to rising US indebtedness and dependence on foreign oil. “We can see the effect of this in the price of gold, which hit a record high today in response to fears about the weakened dollar,” she wrote on her Facebook page.
Sarah never misses the opportunity to show that she missed a few classes. The huge run-up in indebtedness that precipitated the current economic downturn occurred because the dollar was kept too strong. U.S. interest rates were consequently too low and the combination allowed the trade deficit to get too wide. Looking forward, a weak dollar and high real interest rates hold down debt fueled consumption growth and perhaps even generate the capital investment led recovery that goes a long way towards rebalancing the American economy. Ms. Palin would get more mileage from her perceived constituency if her populist rants focused on Asian nations keeping their currencies artificially cheap against the dollar in order to sustain their only competitive advantage -- cheap labor and lots of it.
The chart below illustrates that the recent run up in gold has nothing to do with the perceived value of the dollar. If it did, gold’s real dollar price would be skyrocketing in comparison to the cost of gold for buyers based in yen, euros, or sterling. Because it isn’t doesn’t mean that the dollar hasn’t or shouldn’t lose some of its allure for international investors -- if one wants to argue that the rising cost of gold is a vote against dollar assets. The failure of relative gold prices to break apart can only mean that U.S. trading partners have no interest in a competitively priced dollar. There is, for example, little other reason, given the events of the past 30 years, for the cost of gold to yen-based buyers to remain in lock-step with the cost for dollar-based buyers in real dollar terms. Since 2000, gold has gotten more expensive faster for dollar-based buyers than euro-based purchasers – and the trade balance between the two regions is relatively flat.
My suspicion is that rising gold prices have all to do with global liquidity looking for a safe asset at a time when equity markets are priced high, interest rates are at or near cyclical lows, and the dollar should devalue against those nations who own the bulk of dollar reserves (China and Japan). It is the relative pricing of gold across the major currencies that says the world isn’t quite ready for a U.S. economy poised to export.
