As Gold Goes So (Doesn't) Go the World

     And for a long time this was true-for about 10 years when gold was up the market was up and the world economy was growing. Many are now talking about the bursting of the gold bubble and  aksing what happened. Of course Sumner doesn't believe bubbles exist-as investors are too smart for this.

      http://www.themoneyillusion.com/?p=20691

     I had to get Scott in here somewhere as some-like the reader Greg-seem to be having Sumner withdrawal-I haven't written so much about him the last few days as he hasn't written since Saturday.

     I myself already have commented on the big drop in gold-it's down about 25% from it's high.

     http://diaryofarepublicanhater.blogspot.com/2013/04/gold-bugs-cant-explain-gold-prices.html

     I think another Diary of a Republican Hater reader, Tom Brown, speaks for many when he speaks of some level of Goldenfreude in the face of the collapse. This is understandable as the Internet Austrians and other assortment of gold bugs are very annoying and it's great to see mud in their eyes yet again. David Glasner had a great speculation of what caused the drop in gold: Ron Paul did it.

     "Juliet Lapidos, on the editorial page editor’s blog of  the Times, points an accusing finger at Ron Paul, dredging up quotes like this from the sagacious Congressman.

As the fiat money pyramid crumbles, gold retains its luster.  Rather than being the barbarous relic Keynesians have tried to lead us to believe it is, gold is, as the Bundesbank president put it, ‘a timeless classic.’  The defamation of gold wrought by central banks and governments is because gold exposes the devaluation of fiat currencies and the flawed policies of government.  Governments hate gold because the people cannot be fooled by it.

     "Fooled by gold? No way.

     "But the honorable Mr. Paul is surely not alone in beating the drums for gold. If he were still alive, it would have been nice to question Murray Rothbard about his role in feeding gold mania. But we still have Rothbard’s partner Lew Rockwell with us, maybe we should ask him for his take on the gold bubble. Indeed, inquiring minds want to know: what is the Austrian explanation for the gold bubble?

     http://uneasymoney.com/2013/04/11/the-gold-bubble-is-bursting-whos-to-blame/

     Still I think Greg gets it right in what's really important about the drop in gold prices:

     "Full disclosure guys. I am very much in the goldenfreude mode for the reasons Mike stated above about confidence and a proper understanding of money. Will these crashes make most people examine their views? Probably not, for reasons Krugman talked about a couple days ago, but we really dont need MOST people to we just need a majority of those who make the policy choices to."

    For me that's the key. For me it's the educational opportunity it gives us. In truth gold is just another commodity these days like any other. When it goes up it's not because the market has lost faith in the dollar. When it goes down it's not because the market has regained faith in the dollar or anything else to do with monetary policy. 

    What is interesting is what gold is doing now. Not just gold but all commodities. Since 2003 when gold has gone up most other commodities have gone up and when most commodities have gone up so has the stock market and the overall commodities. Lars Christensen has a piece that shows that gold and the other commodities are sinking while the stock market keeps going up. 

     http://marketmonetarist.com/2013/04/15/never-reason-from-a-price-change-the-case-of-commodity-prices/

    Now this is interesting. As Lars notes, there's been speculation of what this means: does mean that the world economy is about to slow down? This question is natural as during the last 10 years when the global economy has climbed so have commodities and when it's fallen so have commodities. 

    Lars invokes Sumner who tells us to never reason from a price change. The basic point Lars makes here is correct. We certainly can't argue that the economy is about to tank based on the correlation between commodities and the economy-actually what's interesting is this correlation has suddenly stopped. 

     It might mean the economy is going to slump if commodity prices are down because of slowing global demand. However, it could be good supply reasons causing it. What we've seen actually is commodities seem to have topped out back in 2011 while the stock market has continued to rise and the economy has grown. 

     So the long correlation between commodities and growth may have broken down. Oil for instance has basically been flat since then. This means the absolute price has actually come down which is a welcome development for consumers and businesses.