Tags: gold | inflation | krugman

Krugman: Inflation Not Fueling Gold's Meteoric Rise

Friday, 09 Sep 2011 08:31 AM

Gold prices have been soaring in recent years but not due to inflationary pressures that many might think, says Nobel economist Paul Krugman.

Gold has become so attractive due to deflationary conditions and low interest rates.

In other words, but it now before inflation actually becomes an issue.

"The logic, if you think about it, is pretty intuitive: with lower interest rates, it makes more sense to hoard gold now and push its actual use further into the future, which means higher prices in the short run and the near future," Krugman writes in his New York Times column.

"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."


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Loose monetary policies, including Federal Reserve interest-rate cuts and bond buybacks from banks, have pumped the financial system full of dollars in an effort to spur growth, with side effects including a weaker greenback.

Gold briefly shot past $1,900 an ounce, about $100 more than it was just a couple of weeks earlier, as investors race to it as safe haven amid stock-market and currency uncertainty.

"There’s this general fear of currencies losing value at a rapid clip and you are going to see gold as a beneficiary of a lot of money going into tangible assets," says Scott Meyers, a senior trading analyst with Pioneer Futures in New York, according to MarketWatch.



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