Monday, November 29, 2010

Paging Paul Krugman 15: Joe Weisenthal Has Just Discovered Inflation

Joe Weisenthal, the former gold hater, is out with his much anticipated Chart of the Day.

He writes:
 The uber-popular SPDR Gold Shares ETF "GLD" is the subject of a long and fascinating profile in the WSJ titled: How A Fund Helped Make Gold Prices Glitter.

The gist is that in 2004, gold was a dreary, forgotten asset and so the gold industry got together and democratized gold by creating an ETF that tracked the commodity and that since then there's been this huge boom.

Now it is true that the ETF is now one of the biggest holders of gold in the world, and it is true also that gold has boomed since the launch of the ETF, but are the two related in any way?

The evidence is not clear.

As a test, we checked out gold in relation to copper and oil, two commodities that NOBODY thinks are strongly influenced by ETFs. What we see is two things: One is that the gold/copper and gold/oil ratios stayed pretty low for quite some time after the creation of the ETF, even as the ETF grew 10x in the amount of gold it held (it went from holding $1 billion worth of gold to $10 billion after two years, according to WSJ). And even now, with gold near record highs, the ratios are firmly in line with historical norms.
Paul, you have just lost a major ally. What Joe has discovered, although I am not sure he is completely aware of it, is that inflation is in full bloom at the commodity level.

Not only is gold going up in price, but copper and oil are keeping pace. In other words, Paul, the former gold-hater is getting very close to becoming a full fledged member of the inflation camp.

Before, long it may be just you and your Princeton buddy, Ben Bernanke that think deflation is a real threat.

Joe's accompanying chart is here.


  1. Watch out for short term CFTC capital controls, however:

  2. Wenzel,

    I want to go on the record, in this post, in saying that you MAY be setting yourself up to be putting your foot in your mouth about "inflation" (which you keep using to refer to rising prices of specific goods and services themselves as a consequence of expansion in the supply of money and money-substitutes, rather than that expansion itself) sometime soon in the future.

    Then again, you MAY not. I am not going on the record as saying I am predicting you WILL but only that you MAY. And the reason I think this is a potentiality is because of what I view to be your arrogant (in relation to Austrian teaching) abuse of the terms and concepts involved by conflation of causes with consequences.

    Let it be known! Huzzah!