Tuesday, April 16, 2013

What the Decline in Gold Prices Means in Terms of the Economy and the Monetary System

Well It Means Nothing – Gold is Just a Speculative Commodity Like Oil, Wheat and Other Commodities

Those people who think that gold has some type of monetary magic associated with it, and who think the way to make money is to invest in gold have had a rude shock.  Following the large surge in gold prices we have had what happens with almost all commodity bubbles, a drastic drop in the decline in the price of gold.

imageGold posted its biggest one-day percentage drop in 30 years Monday as new signs of a global economic slowdown emerged and fears diminished that central banks' easy-money policies would stoke inflation.
Gold futures for April delivery fell $140.40, or 9.4%, Monday to a two-year low at $1,360.60 an ounce on the Comex division of the New York Mercantile Exchange. That extended their bear-market descent of more than 20% from their 2011 all-time high. Since Thursday, gold prices have declined by more than $203 an ounce, a record skid since the futures began trading in the U.S. in 1974.

So what does all this mean in terms of macro economic policy?  Nothing.  Gold long ago ceased to be a monetary asset, it is simply another commodity.  Yes there are people who believe in the ‘gold standard’ even though they know nothing about what a gold standard is, and there are people who believe gold is the ultimate hedge against inflation, when in fact almost every commodity is a hedge against inflation.

But these are the crackpot members of economic philosophers.  Gold is behaving like any other commodity.  It had a big increase in price, sort of a speculative bubble, and now it has a big drop in price, like any other bubble that has burst.

That’s it, that’s all folks.

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