An Austrian makes the bear case on gold.

Michael Rozeff crunches historical CPI and the gold price in this essay on Lewrockwell.com. Right off the bat, let’s clear the air with this statement, with which I am in complete agreement:

If the economic world of the dollar is going to end anytime in the next few years, then the difference between paying $735 for gold and paying $500 for gold will be irrelevant. I am making no comment about the likelihood of these scenarios, other than to say that they are more likely today, in my opinion, than ever before.”

My suspicion that gold could break $500 is not an argument to sell or not to buy, but reason to buy slowly and without the panic so often associated with this particular economic transaction.

Give the article a read. It is not an exhaustive discussion, but the bear case on gold is still rarely heard, especially from a market participant with a hard-core laisse faire perspective (Robert Prechter also comes to mind).

I was a bit surprised that Rozeff’s record of 1967 grocery prices from his family’s store actualy reflected a slightly lower rate of inflation than CPI.

Apple jelly was $0.40 and is now $2.48. Up by a factor of 6.2.

Red raspberry preserves were $0.55 and are now $3.00. Up by a factor of 5.5

Jif peanut butter was $0.60 and is now $2.37. Up by a factor of 4.

Skippy peanut butter was $0.61 and is now $2.71. Up by a factor of 4.4.

Mazola was $3.07 and is now $13.59. Up by a factor of 4.4.

Pompeiian olive oil was $0.49 and is now $4.08. Up by a factor of 8.3.

Crisco shortening was $0.95 and is now $5.18. Up by a factor of 5.5.

Carnation evaporated milk was $0.19 and is now $1.17. Up by a factor of 6.2.

Borden condensed milk was $0.42 and is now $3.04. Up by a factor of 7.2.

Nestle’s morsels were $0.55 and are now $3.21. Up by a factor of 5.8.

The average inflation factor of these items is 5.75.

The CPI calculator here shows that $1 in 1967 is $6.15 in 2007. …

Rounding, I take $550 to be an estimate of gold’s 2008 price that is consistent with the CPI index. This calculation is supported by the fact that the rather stable price of gold in 1994 grew from a stable price in 1977 and that the growth rate tracked the growth rate of the CPI index between 1977 and 1994. …

Another very simple approach that does not use the CPI at all is to find a linear or arithmetic trend between 1977 and 1994 and project that trend forward. Gold rose from $148 to $384 in those 17 years or $13.88 a year. Over the next 14 years, similar increases would add up to $194. That gives a projected 2008 price of $384 + $194 = $578.

The next approach I use is to relate gold’s price to the prices of base metals. Copper, zinc, nickel, aluminum, and lead all rose substantially along with gold between 2003–2005 and 2008. They were all part of the commodity price rise. Now all of these metals have fallen back sharply. They are either back to their 2003–2005 levels or getting quite close. If gold mimics their behavior, then gold will return to its 2003–2005 level. That level is about $400.

If we see more negative CPI figures in the coming months (raw August and September month-to-month figures were negative — pdf here for Sept), as I expect, the reality of deflation will start to set in, and consensus opinion on cash in general and the dollar in particular will complete a 180-degree turn from the the atmosphere of 2005 to 2008, when gold leapt out of trend.

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2 thoughts on “An Austrian makes the bear case on gold.

  1. Regarding the price differences between 1967 and now for that sample of groceries: I don’t know but shouldn’t increases in productivity and substitutions of cheaper ingredients be factored in? If they’re making the jam with corn syrup instead of sugar, then they’re not comparing the same things. And if they’ve found a way to further automate the jam-manufacturing process so that it’s cheaper to make jam, then wouldn’t the rate of inflation also be understated for that reason?

  2. Yes, substitutions and technology advances screw up CPI in all manner of ways. Its methods and inconsistencies could be fixed by any schmuck who’s passed a statistics course, but politics preclude such honesty.

    Shadowstats.com has CPI using the old pre-Clinton methods (as well as more realistic unemployment and GDP data).

    At any rate, neither CPI nor any other measure of prices should be thought of as ‘inflation’ itself (which is better thought of as a net expansion of money and credit), but as a crude and trailing indication of inflation’s effects.

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