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Strategies & Market Trends : Classic TA Workplace

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To: AllansAlias who wrote (47909)	7/29/2002 10:24:52 AM
From: reaper	Read Replies (3) of 209892

if i may add to the gold, inflation and deflation debate... i am coming to believe that gold is not a signal of inflation or deflation. Larry Summers (who i pick on a lot because he has become so political but who is IMHO a certifiable economic genius) back in 1988 wrote an excellent paper ('Gibson's Paradox and the Gold Standard'; sorry no link) that argued that the relative price of gold was NOT driven by inflation or deflation but was instead driven by (and is the reciprocal of) the real rate of return from the capital markets (i.e. alternative investments). A gentleman by the name of Peter Palmedo (see www.svgold.com) has picked up the baton on Summers' work and written an excellent piece 'The Behaviour of Gold Under Deflation' svgold.com The long and the short of it is that these gentelmen would say that the recent strength in the price of gold is not about the markets signalling deflation or inflation, but about the markets signalling lower real returns from financial assets (i.e. my 'asset deflation'). Mr. Palmedo believes that in a world of 0% real returns from capital markets that gold will appreciate roughly 17% real annually. It is also worth noting that Summers believes (from his 1988 paper referenced above) that the long-run inflation-adjusted equilibrium price of gold (in today's dollars) is +/- $500/oz. So basically being a holder of gold is not about whether you believe in inflation or deflation but instead what you believe future REAL returns on financial assets are likely to be. Thus I am a (small; and recent) gold investor although I am also a deflationist. To give credit where credit is due, many thanks to Barton Biggs at Morgan Stanley for pointing out Mr. Palmedo's work in a recent research piece. Cheers

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