Treasuries, TIPS, and Gold

[phantom power]

Interesting model that shows rising metal prices and a deflationary economy are not necessarily inconsistent:

My usual response has been that I have no idea what drives the price of gold, to say that it’s a market driven by hoarding in Asia, Glenn Beck followers, whatever. But maybe I’ve been too flip here. Why not think about what actually should be driving gold prices? And I mean think about it, rather than going for slogans about inflation, debased currencies, and all that.

Well, I’ve been thinking about it — and the answer surprised me: soaring gold prices may be quite consistent with a deflationista story about the economy.

OK, how do we think about gold prices? Well, my starting point is the old but very fine analysis by Henderson and Salant (pdf), which was actually the inspiration for my first good paper, on currency crises. H-S suggested that we start by modeling gold as an exhaustible resource subject to Hotelling pricing.

... and a bunch of paragraphs and plots later ...

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.

http://krugman.blogs.nytimes.com/2011/09/06/treasuries-tips-and-gold-wonkish/#more-24069

[roamer65]

1. Gold went up during the GD.

From $20.67/oz to $35/oz. Gold double eagles not turned in to the gov't went up even more.

Gold basically goes up during economic extremes, deflationary or inflationary. People run to harder money under both scenarios.