gold’s price could be headed much, much lower, said Campbell Harvey, a professor at the Fuqua School of Business at Duke University. Harvey has looked at gold prices over the centuries, and concludes that it’s still trading at lofty multiples of inflation.
Gold's unglittering wasn't a surprise to some
The gold-price rout began taking shape in the early morning hours Monday, after a sharp Friday selloff in a market that had risen steadily for a decade left traders girding for a downdraft.
At more normal multiples, he told me, it would be changing hands below $800 an ounce. If it gets there, many investors who loaded up on gold coins, bullion, shares of gold mining companies and gold exchange traded funds will get a rude awakening.
There’s no evidence, they say, that gold has been an effective currency hedge or a “safe haven.” And it’s not even a very good hedge against inflation, except in some very extreme circumstances.
Indeed, I would argue that gold bugs’ capitulation on the prospects for hyperinflation is behind the current price collapse.
But let’s start with its value as a currency hedge. “There seems to be little connection between currency returns and gold returns,” Harvey and Erb wrote. “In fact, the change in the real price of gold seems to be largely independent of the change in currency values.”
Nor is it the kind of “safe haven” in chaotic times investors wish for, peasant lore and urban legends notwithstanding.
Harvey and Erb tell about the “Hoxne Hoard,” the largest collection of Roman gold and silver coins ever discovered in England. Archeologists dated the collection to the 5th century AD, “a time of great social stress and political turmoil in England,” when the Romans were abandoning the island.
But when the treasure was unearthed in 1992, it was untouched, suggesting that the wealthy family that hoarded it got little use out of it. “Indeed, the Hoxne Hoard is an example of an ‘unsafe haven,’” Harvey and Erb conclude.
Read Gold’s take on why a big error by Rogoff and Reinhart could undercut the case for austerity in the Independent Agenda.
Gold is also, well, pretty heavy, making it difficult to schlep around when society has broken down and you have to move quickly. Not to mention that we haven’t gotten to that state in the modern world — and all the money printing by all the central banks won’t get us there, either.