Ken Rogoff: "Policymakers Should Be Cautious Seeing Gold's Drop As A Vote Of Confidence"

Tyler Durden's picture

Authored by Kenneth Rogoff, originally posted at Project Syndicate,

In principle, holding gold is a form of insurance against war, financial Armageddon, and wholesale currency debasement. And, from the onset of the global financial crisis, the price of gold has often been portrayed as a barometer of global economic insecurity. So, does the collapse in gold prices – from a peak of $1,900 per ounce in August 2011 to under $1,250 at the beginning of July 2013 – represent a vote of confidence in the global economy?

To say that the gold market displays all of the classic features of a bubble gone bust is to oversimplify. There is no doubt that gold’s heady rise to the peak, from around $350 per ounce in July 2003, had investors drooling. The price would rise today because everyone had become convinced that it would rise even further tomorrow.

Doctors and dentists started selling stocks and buying gold coins. Demand for gold jewelry in India and China soared. Emerging-market central banks diversified out of dollars and into gold.

The case for buying gold had several strong components. Ten years ago, gold was selling at well below its long-term inflation-adjusted average, and the integration of three billion emerging-market citizens into the global economy could only mean a giant long-term boost to demand.

That element of the story, incidentally, remains valid. The global financial crisis added to gold’s allure, owing initially to fear of a second Great Depression. Later, some investors feared that governments would unleash inflation to ease the burden of soaring public debt and address persistent unemployment.

As central banks brought policy interest rates down to zero, no one cared that gold yields no interest. So it is nonsense to say that the rise in the price of gold was all a bubble. But it is also true that as the price rose, a growing number of naïve investors sought to buy in.

Lately, of course, the fundamentals have reversed somewhat, and the speculative frenzy has reversed even more. China’s economy continues to soften; India’s growth rate is down sharply from a few years ago. By contrast, despite the ill-advised fiscal sequester, the US economy appears to be healing gradually. Global interest rates have risen 100 basis points since the US Federal Reserve started suggesting – quite prematurely, in my view – that it would wind down its policy of quantitative easing.

With the Fed underscoring its strong anti-inflation bias, it is harder to argue that investors need gold as a hedge against high inflation. And, as the doctors and dentists who were buying gold coins two years ago now unload them, it is not yet clear where the downward price spiral will stop. Some are targeting the psychologically compelling $1,000 barrier.

In fact, the case for or against gold has not changed all that much since 2010, when I last wrote about it. In October of that year, the price of gold – the consummate faith-based speculative asset – was on the way up, having just hit $1,300. But the real case for holding it, then as now, was never a speculative one. Rather, gold is a hedge. If you are a high-net-worth investor, or a sovereign wealth fund, it makes perfect sense to hold a small percentage of your assets in gold as a hedge against extreme events.

Holding gold can also make sense for middle-class and poor households in countries – for example, China and India – that significantly limit access to other financial investments. For most others, gold is just another gamble that one can make. And, as with all gambles, it is not necessarily a winning one.

Unless governments firmly set the price of gold, as they did before World War I, the market for it will inevitably be risky and volatile. In a study published in January, the economists Claude Erb and Campbell Harvey consider several possible models of gold’s fundamental price, and find that gold is at best only loosely tethered to any of them. Instead, the price of gold often seems to drift far above or far below its fundamental long-term value for extended periods. (This behavior is, of course, not unlike that of many other financial assets, such as exchange rates or stock prices, though gold’s price swings may be more extreme.)

Gold bugs sometimes cite isolated historical data that suggest that gold’s long-term value has remained stable over the millennia. For example, Stephen Harmston’s oft-cited 1998 study points to anecdotal evidence that an ounce of gold bought 350 loaves of bread in the time of Nebuchadnezzar, king of Babylon, who died in 562 BC. Ignoring the fact that bread in Babylon was probably healthier than today’s highly refined product, the price of gold today is not so different, equal to perhaps 600 loaves of bread.

Of course, we do not have annual data for Babylonian gold prices. We can only assume, given wars and other uncertainties, that true market prices back then, like today, were quite volatile.

So the recent collapse of gold prices has not really changed the case for investing in it one way or the other. Yes, prices could easily fall below $1,000; but, then again, they might rise. Meanwhile, policymakers should be cautious in interpreting the plunge in gold prices as a vote of confidence in their performance.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
knukles's picture



maniacal laughter   we are so far past trying to explain things, now


I gota go taper

max2205's picture

They should not because they caused it to drop....just saying

nope-1004's picture



The reason for owning gold is for protection from what we call tail risk.  That is, very bad things happening in the economy.

- Bernocchio


My reason for owing gold is for protection from what I call white collar crime, bank bail-ins, and an insolvent fiat regime.

- nope-1004


Ben, take your 'tail risk' and shove it.


francis_sawyer's picture

The only time I lose confidence in gold, [on a drop], is when my sailing vessel DROPS to Davy Jones Locker...

outamyeffinway's picture

Was that a suggestion to buy gold.........?

francis_sawyer's picture

It was a suggestion to understand the art of "Shipwrighting"...

prains's picture

pontoon your Ciabatta, chin strap optional

francis_sawyer's picture

& pray that your wife really loves you because you're a big Barry White lookin' motherfucker...

Pladizow's picture

Where was this "golden clarity" when this co-author released his fraudulent report?

philipat's picture

"Meanwhile, policymakers should be cautious in interpreting the plunge in gold prices as a vote of confidence in their performance".

Other than their performance in actually supressing the price of Gold.

Dark_Horse's picture

When rates were near zero, gold was the the lesser of 2 evils, with the same carrying cost, and it had momentum supporting it too.

Now that rates are on the move, holding gold in excess starts to smart. Rate change has triggered the rebalancing to reasonable allocations going forward.

Gold will need a significant catalyst now.



espirit's picture

Bernanks Photo Kaption Kontest:

"I can tell Krugman had Foie Gras and Steak Tartare for dinner". 

Scro's picture

This is where I stopped reading. What a tard.

By contrast, despite the ill-advised fiscal sequester, the US economy appears to be healing gradually.

Scarlett's picture

the propaganda never stops now does it?  


Please go shopping.  Do not worry.

Hulk's picture

Just remember to wash your hands. We don't want the entire ZH community infected ...

Go Tribe's picture

No kidding. These gold articles are becoming mnotonous.

MeelionDollerBogus's picture

Any time I could redux the entire article to "gold, bitchez" this is the case.
Meh. I don't need special encouragement other than a cheaper price to load up.

Stoploss's picture

Especially when we all know the monetization will never stop.

The funniest part is the shorts are going to be decimated.

Bastiat's picture


I've been considering this theory of the gold short end game:  a few hedge funds are seeded by the commercials (the bullion banks). They take large positions-they may or may not have other client money, likely they do.  They are big enough to move the market and get the attention of all the momo chaser, piggy-back hedgies.    The seed players will know when the reversal is coming--in fact they will likely trigger it when the buy back in (to redeem the "investments" of the bullion banks, of course).  They other clients will get clobbered but may still make money if they are out first.  The slow will get the muppet extraction.  The momo-chasers will kill each other and their clients.  

In the meantime, the bullion banks are already long and continuing to pick up all the forwards sales they can get out of the miners.

spine001's picture

"By contrast, despite the ill-advised fiscal sequester, the US economy appears to be healing gradually. Global interest rates have risen 100 basis points since the US Federal Reserve started suggesting – quite prematurely, in my view"

I started loughing so bad after reading this line, internally contradictory that I couldn't continue reading the article since it became a joke.

gjp's picture

revealed his true colors there din't he? Just another sycophant apologist

zorba THE GREEK's picture

If by falling you mean manipulated by desperate government officials,

then I agree with your premise.

Stuck on Zero's picture

An ounce of gold can buy 600 loaves of bread today?  What is this guy smoking.  A decent loaf of bread goes for $4.50 today.  That means you can only buy 240 loaves of bread.


MeelionDollerBogus's picture

Where I live 2.20 to 3.30 can get a decent loaf of bread. if you're paying 4.50 it's either garlic bread ready to throw to the oven in a foil bag or some other specialty giant loaf the size of 3 normal loaves of bread for making sandwiches.

Bastiat's picture


"Policy makers" don't suffer from the delusion that the market pricing of gold conveys real information, since they themselves are behind the manipulation.

They should be more concerned about the Chinese other central banks accumulating gold as a Vote of No-Confidence in the US Dollar.

Croesus's picture

Exactly, +1,000.

The move away from the BernankeCoin will not be stopped, regardless of the Fed's confidence-boosting shell games.

All paper will burn.

Quoting Seek's post (below): The fact that gold is manipulated lower is actually a sign of no confidence by the very central banking authorities that worked to lower it!

CheapBastard's picture
Bundesbank Warns China's Currency "On Its Way To Becoming Global Reserve Currency"




Dr Joachim Nagel Member of the Executive Board of the Deutsche Bundesbank

The Internationalisation of the Renminbi

SoberOne's picture

Event horizon, bitchez.

duo's picture

since I lack access to nearly free money from the FED and GSEs, and don't have enough to buy insider information from the NSA, I guess I'm no better than a Chinese or Indian peasant.

sodbuster's picture

Chinese and Indian peasants have a whole lot more honor and moral compass than the shitbags running the US and the EU.

CPL's picture

The people on the ground do because if they don't it costs them something, they've got skin in the game.  

Their governments however are mostly built of the same type of douche bags that run the US and EU.  All political cum dumpsters and sock puppets, might be the odd honest honest man/woman running a tight platform.

olto's picture

sodbuster: fixed

"Chinese and Indian peasants have a whole lot more honor and moral compass."

seek's picture

Policymakers request gold to be manipulated lower, it falls, and then they take that to be a vote of confidence? If that's their thinking, we're more fucked than I thought.

No, the gold price is an echo of Volcker: "...Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake." Volcker said that about 1973, and they're not repeating the mistake this time.

The fact that gold is manipulated lower is actually a sign of no confidence by the very central banking authorities that worked to lower it!

Temporalist's picture

Of all the people that I know nearly all invest(ed) in stocks and real estate; I can number those that bought gold on one hand.


*Oh and the Chinese and Indians are still buying in record amounts.

Al Huxley's picture

gold – the consummate faith-based speculative asset


I actually think USTs are the ultimate faith-based asset.

Alexandre Stavisky's picture

No, Gold is not faith based.  No animal comes to gold as a godly good.  It is shiny and holds up. It is somewhat scarce.  That's it.  If shit would hold my daily labours at a constant so that in my old age I could spend them to equivalent effect, I would stock pile shit.  And would write arias about its essence, scent, usefulness, and even dietary desirableness.  However as I have perused the many options to contain value and have found all (like gold miners) full of holes with liars at the entrances, I have resolved upon gold.  For its durability, its scarcity, and because above all I could never see a Savoy Row suited son of the satanic order of central banking donning a tin cup hat with a tiny orb, donning a onepiece fits-all double stitched, double pleated union suit and riding a small car unfit for upright seating and taking pickax and shovel and drawing out of the god's green good earth whatever tiny nugget He so fits to bestow upon them.  Mining is dirty, dangerous, difficult, demoralizing.

So much better to set up the system and rule from on high in the higher ether with suit, vestment, accolade, and printing press.  Actually condescending to the true printing press has a soiling element to it and so that is off-agenda.

Fact is ruler and slaves.  Set up the system to preserve that, all is well.  But usury in its endgame crushes the throughput.  Banker hates the constraint.  Gold constrains the banker.  Even paper (at apogee power) constrains the banker.  Must develop new control buttons without physical constraint, to be called Derivatives.  Debt must be pushed to the next stage.  Inconsequent of realities, must defy the REAL.

Gold is the fallback upon the full-out rout.  The terrific, nearly-killed wild-eyed almost-died rallying point after unstructured, utter, moment-before-death defeat!

The market calls, no merchandise, but the market is filled with chits, affidavits, electronic promising, transparent claims upon goods-no-longer-wanted.

Yes please.  Fill my future with empty promises, award me with verbosity and deep-kneeling pledges of payment.  But my purse is filled with...? Ah, Bereftness.

Read your pink pages, watch your finanmedia, stare at the tickers.  Do those numbers hold any value or meaning anymore?  What is a number?  When every number can be inflated or reduced at will by currency manipulation.  There is no definable area by which you can make true investment in ANYTHING!  Charting (when the globe has been rent), Fundamentals (when every lie has been codified), Momentum when real movement has been swept from the floor by electronic proxy.

Please.  People.  Wake. UP!  All the sanctuary statuary is a corrupted whitened sepulchre of contemptible corruption.  Nothing in Global governance or global marketplace can be TRUSTED!  Every regulatory, advisory, brokerage, depository has been demonstrated to have been compromised.

And the ultimate parlour token of a bankrupted business still being circulated?  US Dollar.  Doesn't even burn well.  Every reservoir of liberty, every container of value, every proxy by which representation is made, has been altered and diminished.

How stupid the cattle that eat stones believing them to be nourishment.  THERE IS NOTHING LEFT!  THERE CAN NEVER BE A RESTORATION OF THAT WHICH HAS BEEN CONSUMED!

The fact that this Potemkin artifice of living continues on is only, ONLY BECAUSE EFFUSION OF MONETARY UNITS STILL MAKE THE CATTLE DROVE TO THE FEEDING POTS.

But the Debt is far too huge.  The Real Production of the earth far too scarce.  And the dumbed-down vehicles (humans) which still offer up devotional offering for naught are receding from the field.  THE ROUT IS ABOUT!  Without Gold, there can never be a Rallying to bring about economic man.  Nations are in full "strategic withdrawal"; it is only MOMENTS before the coalitions, large and small of mankind, ROUT.  And then every man for himself.

Wish to Rally?  Better make it Gold, and Durably, Reliably.  Even then many years must pass before men will extend their trust to the monumental folly-filled extensions of this day.

The End of Days.

CSA's picture

As long as you don't pay at today's inflated gold prices, your entire essay is correct.

MeelionDollerBogus's picture

inflated? Gold is easily 10% of its future value. Price is highly depressed good value discount.
To call this "inflated" is like saying an "inflated price" for bread is a dime for a loaf.
Just utter nonsense.

sodbuster's picture

Only one way to view the drop in gold and silver- they're running a sale, bitchez!!! Buy REAL value with paper fiat that is being defaced to the tune of $85 bln a month!!! Thanks Bernank, you f'n wanker!!!!

Cacete de Ouro's picture

This article is way off of anything remotely resembling gold market analysis. I suggest Rogoff spend some time talking to the Bank of England FX division who rig the London Gold Fixings, rig the whole London market supply, and who have really fucked up central bank clients 'earmarked' holdings. Then talk to the BIS traders who control the price on behalf of the BIS governors. Then talk to Dudley who oversees FRBNY intervention into the Conex..

What a load of BS this article is....

outamyeffinway's picture

Clark Kent = Superman

Ken Rogoff = Superneutralman

jepicza's picture

That was deep... I am still crying.

EclecticParrot's picture

Yeah, kind of a slow day all around today -- pre-Bernanke yawnings.  Like an all-night eatery that drops a basket of fries into the hot oil every 45 minutes, just in case, we've been treated to this hour's ZH gold article.

JustObserving's picture

The world is awash in fiat money.  All the gold mined in human history is worth $6.4 trillion.  All the gold bullion available in the world now is worth $2.7 trillion.  The land value of Beijing alone is $20 trillion.  The land value of Shanghai is worth another $20 trilllion at least.  All the real estate in China is worth at least  $200 trillion.  All the real estate in China twenty years ago was worth less than $5 trillion. 

Gold is very inexpensive compared to the wealth bubbles that exist in the world today

unwashedmass's picture


gold is in backwardation now. 

some vote of confidence. 

they are just creating and enforcing the CB's kill zone......


Bangin7GramRocks's picture

Gonna be a shit ton of empty former big-ass book stores soon. What new retailer will possibly fill those spaces?