Bugger Gold

Mike Smitka

...Gold is for Fools...

The case for commodity metals as an investment must rest either on a supply/demand story or on expectations. Now platinum is valuable as a chemical catalyst. However, dear to an economist's heart, when prices rose for legitimate scarcity reasons, then lo and behold! -- there are other catalysts out there. Gold has some industrial uses, due to its chemical inertness and electrical conductivity. But not many, at current prices. Then there is jewelry. OK, the world's middle class population is growing, though "bling" tends to fads. However, inventories are huge relative to that demand. So gold's value rests fundamentally upon speculation.

Worse, that speculation is driven by one story: inflation. As a Japan specialist, I'm more familiar with the opposite: Japan has seen consumer price deflation, admittedly at low levels, for a baker's dozen of years, while the domestic corporate goods index has fallen on an episodic basis for 25 years. Yet this is despite an increase in base money that in the old days economists of all stripes would have presumed a harbinger of hyperinflation.

Well, the US and EU are set to follow Japan's path. Underlying a rise in prices must be an increase in the largest single cost in a modern economy, labor. I don't see that happening anytime soon. Institutional rigidities make downward wage adjustment slow -- compensation systems in large employers in Japan are highly bureaucratic. But such employment didn't expand; contingent employment did. Japan is now a nation of part-time and short-term contract workers, at least among the young and women and older workers. Worse (better? -- consider the alternative!), productivity also rose. Paired, they meant falling costs.

Institutions in the US and the EU differ; our bias is towards unemployment rather than falling wages. But all in all I'm betting on mild deflation -- and hence I'm not buying gold.^[note] There's a flood coming, and the foundation of today's prices is muddy, not even sand. Gold prices should be falling since 2008, not rising.

In Edgar Allen Poe's whimsical short story "The Gold Bug" there is method in madness. In today's markets there is only madness.

Note: To be honest, I'm the unintended owner of two houses, so I've no leeway to buy anything!