[For some reason, CNBC's Larry Kudlow
showed up quite a bit back at the old blog when it began seven years ago,
but, I can't remember the last time I saw him on TV or read any of his
commentary. I suppose that can be considered progress. Anyway, Larry and
former Fed Vice Chair Alan Blinder were talking about gold when this item
originally appeared back on September
21, 2005 and they had a few interesting comments about the metal that, on
that day, fetched $469 an ounce but was poised for a move higher, just
waiting for a catalyst.]
Yesterday, the Federal
Reserve took another baby step toward safe and sane monetary policy by
raising the overnight bank lending rate from 3.5 percent to 3.75 percent. The
policy statement acknowledged the devastation caused by Hurricane Katrina,
but indicated that accommodation would continue to be removed at a
While noting that core inflation has been low, that
underlying inflation is expected to be contained, and that longer-term
inflation expectations remain contained, they acknowledged that higher energy
prices have inflationary
That’s a lot of talk about inflation –
for a moment there it looked like they were going to tell us that we actually
Gold as Kryptonite
It is not often that we tune into CNBC – it is
best taken in small doses, abstinence is ideal. Yesterday, we did happen to
catch a portion of Ron Insana’s panel
discussion after the Fed policy announcement. Former Fed vice chairman and
devoted Greenspan worshipper
Alan Blinder was one of the guests.
A chart of the historical relationship between real
oil and real gold prices was shown. The chart clearly showed the decades long correlation between these two commodities and
indicated in a not-so-subtle way that gold
would be closer to $1000 than $500 if this relationship had
not broken down over the last few years. Barry Ritholtz
over at The
Big Picture had this chart up the other day – apparently Ron showed
this chart last Friday as well.
Hmmm… Perhaps Ron owns some of the yellow
metal. Or, maybe he’s just curious.
After a few words about commodities and inflation, Insana asked Blinder a long and tortured question about
the Federal Reserve and gold. Here is the discussion that followed:
I’m not sure what the question was. Are you asking should the Fed be
talking about the price of gold?
Should it be looking at the price of gold as an inflation indicator. Yeah.
I think it’s time we outgrew gold. The numbers that you just cited show
that gold’s been a lousy investment, but that’s kind of beside
the point. It’s also not a good indicator of the stance of monetary
policy, the state of bank credit, a predictor of inflation, or anything like
Judging from this brief discussion, we conclude that
gold must be like
kryptonite to central bankers – we couldn’t help
but notice that at just the mention of gold, Blinder’s multiple facial ticks, already apparent prior to the gold question, quickly
intensified and stayed elevated during this exchange.
It was quite odd to listen to a Fed economist, with
little control over any muscle on his face, dismiss gold. We wonder if any
Chinese or Japanese central bankers were watching.
While we tend to agree that gold has been a lousy
investment since 1980, we also acknowledge that it may not be relevant to
monetary policy or bank credit. Moreover, we question how good a predictor of
inflation it has been or will be – it seems so much depends on how inflation
is one thing that we are sure that gold is useful in predicting.
That one thing also happens to be the title of a catchy REM song from five or
ten years ago … the one thing that the gold price surely excels at
predicting is – the end of the world as we know it.
Maybe the prognostication has already begun.
Meanwhile, over at the National Review Online, we
find that Larry Kudlow has penned another
Normally, we get right at the business of mocking Larry’s statistical
sleight of hand, but we find ourselves caught off guard at the first line in
his current offering:
“With gold knocking at the door of $470 an
ounce, a degree of uncertainty has crept into the inflation outlook
Respect for gold? Like CNBC, Kudlow
dosage should be severely restricted, so we don’t know if Larry has a
long-standing respect or fascination with gold, but obviously it does not
have the same Kryptonite-like effect on Wall Street economists as it has on
After waving his magic wand to come up with a few
benign statistics – surplus money creation of 1.5 percent and inflation
measures of 1.8 and 2.1 percent – he starts making sense again:
gold remains a core indicator of future inflation, and the
recent spike near $470 an ounce demands attention. Prior to this, gold had
traded in a generally narrow range in the past nine months, with a high last
Friday of $457.20 and a low of $411.10. The London afternoon fixing price had
ranged from 6.3 percent above the nine-month average ($430.06) to 4.4 percent
below it. That’s a fairly stable record.”
So, gold is an indicator of future inflation? A
“core” indicator? (Thankfully, not a “core” indicator
of “core” inflation.) Larry seems to be quite interested and
perplexed with the gold price action lately, as are many others in the
financial media. Maybe “concerned” would be a better word.
“Other real-time indicators also have
reflected a non-inflationary monetary environment. Bond yields around 4.25
percent remain at four-decade lows. Spot
commodity prices (that exclude energy and gold) have flattened out
and stabilized over the past twenty months. The exchange value of the dollar
has been gradually rising this year. Even the oil spike is abating. Sweet
West Texas intermediate crude is trading around $65 a barrel, 7 percent off
its August 30 peak. Unleaded gasoline has plummeted 25 percent.”
We still don’t know how long term yields, the
“conundrum”, having confused and confounded legions of analysts
and commentators, can still be relied upon to predict future inflation. It
seems that while there may be confusion about just about every other aspect
of long term bond yields, the
predictive value relative to inflation expectations is intact.
Is this sound logic or wishful thinking?
And, finally, we get our first glimpse of the future
of commodity price reporting. It’s not stated here, but we see where
it’s going – if you take energy and gold out of commodity price
reporting, you get the “core” rate of commodity price increases,
which, not surprisingly are more apt to be … benign.