PAUL KRUGMAN: Here’s The REAL Reason Gold Has Been On Such A Tear


Traditional economists have a hard time wrapping their heads around gold and why people love it so much.

Nouriel Roubini has been calling gold a bubble for a long time, saying you should buy spam (the meat) instead.

When Bernanke was asked about gold recently, he said its rise was mainly due to “tradition” and not because of anything intrinsic.

Naturally, both Bernanke and Roubini have been the subject of a lot of mockery from gold bugs, who have watched their portfolios swell.

In a new post — that he says he wrote during a sleepless night at 4:30 in the morning — Paul Krugman writes that he’s mainly been in the camp that can’t explain the surge in gold, but that there might be something logical to it.

His post is fairly wonkish (as he says), but his conclusion is that gold’s soaring price has nothing to do with inflation and nothing to do with people viewing it as a currency, and nothing, even, to do with paper currency “debasement.” Instead, it’s perfectly consistent with low growth expectations and deflation:

The logic, if you think about it, is pretty intuitive: with lower interest rates, it makes more sense to hoard gold now and push its actual use further into the future, which means higher prices in the short run and the near future.

But suppose this is the right story, or at least a good part of the story, of gold prices. If so, just about everything you read about what gold prices mean is wrong.

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. So people who bought gold because they believed that inflation was around the corner were right for the wrong reasons.

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