Why Gold's Real Dilemma Is Not 'Reverting to the Mean'
By Staff News & Analysis - April 24, 2013

Gold's Declining Price Is a Reversion to the Mean … Since the beginning of the economic crisis in 2008, conservatives have been predicting that inflation is right around the corner. They base this prediction on the vast increase in the money supply that the Federal Reserve brought about in order to keep the financial system from imploding. Because a too-rapid rise in the money supply did indeed bring about inflation in the 1970s, conservatives believe that a repetition of that experience is inevitable. – New York Times

Dominant Social Theme: Gold is done.

Free-Market Analysis: This is an interesting argument from an intriguing mind. Bruce Bartlett, the author, once worked as a staffer for libertarian conservative Ron Paul, yet he is also known as a classical Keynesian from an economic standpoint.

Bartlett doesn't seem to like gold very much, nor what it stands for. He claims gold has lost luster because there is no price inflation and thus people are shedding their gold holdings and gold is "reverting" to a lower mean price.

Both arguments – the emotional and the putative – provide us with the inkling that like many Keynesians, Bartlett is more comfortable with state-created monopoly fiat money that free-market money. Here's more:

Many conservatives jumped heavily into the gold market in 2009 based on their expectation of inflation or even hyperinflation. They believe that gold is the best possible hedge against inflation because it is something real, whereas "fiat money" is essentially worthless.

Initially, gold investors were rewarded. The price of gold roughly doubled between 2009 and 2011, from about $900 an ounce to about $1,800 an ounce. Since then, however, the gold price has fallen fairly steadily, reaching about $1,600 an ounce before a sharp break in the last two weeks that brought the price down to about $1,400 an ounce. (Kitco, a precious metals dealer, is a good source of recent gold price data.)

The rise in gold also led some conservatives to renew their advocacy of the gold standard. They believe that all our economic problems are fundamentally caused by the unstable value of money, which results from Federal Reserve manipulation. The Lehrman Institute, a well-financed conservative organization, has been actively promoting a return to the gold standard.

The core argument for the gold standard is that the real price of gold doesn't vary over time. All nominal price changes result solely from changes in inflationary expectations, gold standard advocates believe. They point to research by the economists Roy W. Jastram and Stephen Harmston to the effect that over very long time periods the real, inflation-adjusted gold price is roughly constant.

What gold standard advocates tend to forget, however, is that the "very long time periods" part of the analysis means over centuries. The short-run price of gold basically indicates nothing insofar as monetary policy is concerned. As a thinly traded market, gold is often subject to manipulation and prone to bubbles and crashes.

Some problems. Bartlett fails to differentiate between a private market gold (and silver) standard that would allow the value of money metals to fluctuate based on consumer preference and a state-run gold standard.

Having entirely glossed over this issue, he then claims that the argument for a gold standard is that the price of gold does not vary over time. This misses the point even of what even the (inadequate) state-run gold standard would accomplish.

The idea of a gold standard is to RESTRAIN monopoly central bank money printing, which in turn would tend to stabilize price inflation. The rationale for a return to a gold standard has little or nothing to do with the price stability of gold itself – which in certain kinds of state-run standards would itself be fixed.

It is not clear why someone as savvy as Bartlett would make elementary errors in terms of his analysis. But as we are not interested in psychoanalyzing him, we will only state once again that perhaps the bias simply arises from his adoption of a Keynesian attitude regarding the yellow metal's "barbarism."

To buttress his argument, Bartlett cites a recent paper by economists Claude B. Erb and Campbell R. Harvey that "present[s] strong evidence that the gold market was severely overbought."

But only a paragraph later, Bartlett finally provides us with significant clues to his state of mind. He writes, "Most gold bugs consider themselves to be libertarians and support the gold standard and gold as an investment because of their deep distrust of government. But the greatest libertarian of the 20th century, the economist Milton Friedman, always thought that the gold standard was nuts."

In two sentences, Bartlett encapsulates the real – underlying – argument between gold and fiat. It is an argument between statism and freedom. He then labels Milton Friedman the "the greatest libertarian of the 20th century" – a characterization he must know is controversial considering that Bartlett worked for Congressman Ron Paul who was close friends with the Misesian Murray Rothbard who disliked Milton Friedman a good deal.

Friedman invented tax withholding in the United States and also suggested that central banks simply issue the same amount of money each year (how would they arrive at that figure, we wonder) and be done with it. In this sense he was not anti-central banking so much as he was anti-inflation.

For Bartlett, the question is one of price inflation in particular and his analysis is structured around the apparent lack of it. For fairly obvious reasons he doesn't acknowledge the larger argument that is taking place between proponents of free-market money and state money.

He also doesn't acknowledge points that we have made here at DB that have been made elsewhere as well. The sell-off gold occurred mostly in the paper market – a market that is easy to manipulate. Physical gold is apparently in short supply and there are plenty of buyers for it, especially in India and China.

Bartlett does not provide us with an accurate analysis of what the future holds for gold (and silver). We understand that the future value of these money metals will be determined by whether or not those who want to repress the price of gold for various reasons are going to win the day or whether market demand will eventually triumph.

This is not in any sense an incidental question as markets always DO assert themselves but the fundamental question for most of us is how long will this take.

Gold is down, and could go down further – and perhaps stay down. The price is controlled by a consortium of "wise men" and enforced by a maze of regulations, reciprocal agreements and plain old intimidation. Some may wish to trade gold at its apparent real price on emergent gray and black (free) markets. But most probably will glumly accept that the paper price has imposed its will on the physical one.

If indeed this is to be the scenario, then gold bugs should eye the future warily, understanding there are enormous and implacable forces at play. But if one believes that what we call the Internet Reformation is gradually exposing these manipulations and the chimera of monopoly fiat central banking itself, then perhaps the future of money metals is brighter than is now forecast.

Do you accept the persuasiveness of the current globalist dominant social theme or do you believe that it cannot stand and lacks "legs"? This is real dilemma and it has little to do with gold "reverting to the mean."

After Thoughts

Where do you stand?

Posted in Gold & Silver, STAFF NEWS & ANALYSIS