The next recession won’t be so bad. That’s it, that’s the prediction. But first…
In 2012 the academic Campbell Harvey of the Harvey & Erb comedy troupe predicted gold was going to $800/oz. due to its poor record of inflation protection. In fact, as a side note to this post ole’ H&E have in 2019 updated the “Golden Dilemma” as the Golden Constant.
In The Golden Dilemma, Erb and Harvey (2012) explored the possible relation between the real, inflation adjusted, price of gold and future real gold returns. This update suggests that the real return of gold over the next 10 years could be about -4% per year if the real price of gold mean reverts or -12% per year if the real price of gold overshoots and declines to previous low real price levels. This view reflects a “golden constant” hypothesis that inflation is the fundamental driver of the price of gold. Of course it is possible to entertain other hypotheses. A “golden constant” perspective suggests a fair value price for gold of $840 an ounce and a possible overshoot price of $353 an ounce.
Oh, it is possible to entertain other hypotheses, eh? Well that’s good, but this hypothesis hatched as only academia could, is now 7 years of W.R.O.N.G. But of course, it is possible to entertain other hypotheses. Ha ha ha.
But the important thing is that gold is not even about price. These eggheads are simply casino patrons with fancy words. No better than inflationist gold bugs or price-obsessed adrenaline junkies. Gold is not now and has not been about price. It is about value. The price assigned to “value” fluctuates greatly and is informed by many different factors within the macro markets and financials systems. Inflation is just one of them, and often not a dominant one at that.
I took note of it because 2019 has been the year when the public has been on high alert about the dreaded yield curve inversion (public: “I don’t know WTF that thing is, but it sure does sound bad!”) and now we are served up an economic egghead who created quite a bearish stir about gold a few years ago.
Granted, the article portrays Harvey as something of the father of the yield curve, so maybe he knows what he’s talking about. He’s a professor, after all.
Harvey’s three-decade old dissertation on the yield curve’s predictive powers has continued to draw attention in financial markets, especially after short-term yields popped above long-term yields earlier this year. The bond-market phenomenon raised fears that the U.S.’s record expansion would finally come to an end.
Okay, the post is going too long. You can read the whole article if you’d like. But the bottom line on the yield curve is not this year’s inversion. The bottom line is that when the real steepening comes about things are going to change. If the change is deflationary there would be pain far and wide. If it is inflationary, there could be pleasure in certain areas and pain in others.
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