Gold prices continue to decline. Therefore I ask all of you internet Austrians and gold bugs out there who think that we are heading for hyperinflation what the hell is the reason for the drop in gold prices? I thought you told us that we where going to have hyperinflation?
And while we are at it could you (other) people who are telling us that commodity prices are driven up by “evil speculators” tell me if these speculators now have decided that commodity prices should drop?
The Market Monetarist 
Rien Huizer
/ May 16, 2012The reason is excess supply relative to demand, each of which may vary over time. Apart from the fact (yes fact) that gold as a monetary anchor would not work (central banks linking the external value of their currency to gold and gold to… the USD (vice versa) do you see the US settling with the PRC in gold? ) there is of course the much more interesting point that a very large part of the cost of ming gold is linked to oil (producing gold is essentially shifting/grinding/leaching a mountain of rock to produce an attache case worth of the stuff and most of that cost is diesel or energy sources linked to oil, plus LOTS of chemicals also linked to oil) Mining feasibility depends on a particular deposit’s position on the cost curve (the riches/cheapest to process deposits on top and the things with high costs at the bottom). One can relate expected demand (industrial plus ornamental) to the productive capacity of the mines ranked by cost. That would probably come out at far below the current price but still not very far from recent historic prices. Of course a shift in the cost of oil would change the positions on the curve (easy to mine, or well established would move up and lower grade more expensive to process move down. Mines with a lot of sunk “oil consumption” relative to current production requirements would also do better than new ones.
Now, current gold prices are so high that even relatively poor deposits are being exploited (for instance the low grade giant Boddington mine in W. Australia will be doubled, despite the fact that the resource for the original mine became viable only 10 years ago. A drop in the gold price might slow down the rate of expansion very quickly because most of the new capacity being considered has a much higher break even point that the top end of the cost curve.
There are three other things to consider: the world’s stock of produced gold is much larger than physical market turnover. The only reliable “sinks” are ornaments (especially India) and industrial use without economic recovery potential. The remainder of this large stock is more or less in play, hence we have characteristics like the housing market: lots of public gold, with an ideology-based utility, much less private sector “utility” gold, some private investment and underlying for exchange traded derivatives.
Would this be a more interesting anchor than a composite of the world’s oil indices (add a few base metals too)? I’d rather extend the EUR to include all of the EU (OK, you can keep the DKR but as a currency board item), Nafta, China, Japan, etc, the EUR to be renamed at a later stage UMU (universal monetary unit). The BIS will issue UMUs to central banks who can use them for a limited range of purposes and clearing system deficits must be settled daily. Each participating country would offer 1/10th of its population as collateral, to be held at the BIS/ECB/FED’ custodial facilities.
tjjivehour
/ May 16, 2012I wish the decline in some of these commodity prices (such as Oil, given the recent demonizing of those “devious speculators”, a fun bit rhetoric to see get pulled out prior to national elections every cycle) would get more than just the blogosphere treatment (you and Mark Perry seem to be the two most vocal blogs in that regard)! I feel like every day I’m reading a new op-ed about those devious speculators, who also like to kick baby kittens and eat aborted fetuses in their spare time when their not bending consumers over the table, are the ones driving up costs. But then when prices begin to decline, where’s the credit for that? Keep preaching brotha, the good word will begin to penetrate the masses one of these days 🙂
cthorm
/ May 16, 2012This is an easy one Lars. Changing expectations are causing the fall in gold prices. Market monetarist ideas are gaining momentum and those not wholly committed to Austrian theories of inflation are getting cold feet. I can’t say how quickly the downside will accelerate, but I don’t see a scenario where the upside returns (at least in relative terms, since more monetary easing is correlated with all assets these days). My personal long term account has been heavily in the Real Estate-linked income producing assets. So far so good. I admit I rode the commodity/gold train for most of 2010 and early 2011, which turned out to be pretty good timing.
JP Koning
/ May 19, 2012Chinese real interest rates have finally turned positive. Now Chinese savers can invest in the banking system and earn a return rather than buying up zero-yielding durable assets like gold and apartments.