Does gold price collapse really represent confidence in the global economy?
Policymakers should not allow gold's collapse to provide a sense of accomplishment, argues Harvard economist Kenneth Rogoff in a recent article for Project Syndicate.
Rogoff – influential yet much criticized because of his work with Carmen Reinhart on the relationship between public debt and GDP growth – suggests that a surge of "naïve investors" and weakening gold market fundamentals go a long way to explain bullion's recent decline.
Resurgence of the global economy seems, thus far, to be a much less significant part of the narrative.
The changing demand landscape is far more convincing: the Chinese and Indian economies continue to slow, "doctors and dentists who were buying gold coins two years ago now unload them…and with the Fed underscoring its strong anti-inflation bias, it is harder to argue that investors need gold as a hedge against high inflation."
Rogoff closes with a reminder of the natural volatility of the gold market and a warning to those working the levers of power: "yes, prices could easily fall below $1,000; but, then again, they might rise…policymakers should be cautious in interpreting the plunge in gold prices as a vote of confidence in their performance."
Read the article in full here.