This summer bore witness to a rather tedious, politicized discussion about the resurrection of the gold standard. But one can argue now that the idea of a gold standard is outdated. Why? The reason is simple: gold, over the past ten years, has already handily and beautifully served its balancing function to the end of growth and the manic attempt of governments to fight industrial decline.
Moreover, “debate” of the kind seen recently between high profile investors such as Warren Buffet and Ray Dalio further illustrates that the discussion of gold remains trapped in identity politics. It is as though mere association with gold confers all sorts of meaning. But none of this actually pertains to gold’s new role, here in the 'era of no growth'.
Interestingly, Paul Krugman has done some of the best (and politics-free) commentary on gold in the past year; I highlighted his views in last Autumn’s essay Gold and Economic Decline
. I remain in agreement that the poor prospect for economic growth, rather than inflation from ‘money-printing’, has been the primary driver of gold for the past decade
. Gold has, accordingly, outperformed nearly every other asset – especially stocks and real estate – and for good reason. Krugman wrote:
For this is essentially a “real” story about gold, in which the price has risen because expected returns on other investments have fallen; it is not, repeat not, a story about inflation expectations. Not only are surging gold prices not a sign of severe inflation just around the corner, they’re actually the result of a persistently depressed economy stuck in a liquidity trap — an economy that basically faces the threat of Japanese-style deflation, not Weimar-style inflation.
While many participants continue to use gold as a call option on future inflation risk – and from a resource and food standpoint, there is substantial inflation risk – the launch of QE3 more pointedly confirms the failure of Western economies to produce growth
. It's for this reason that gold should prove to be more sensitive to reflationary policy than industrial commodities over the next year.