Continuing to grapple with gold

Two pieces from yesterday's Wall Street Journal - one a lengthy editorial and the other just a few paragraphs in the Ahead of the Tape column - are continuing evidence that, generally speaking, the mainstream media (and particularly economists) still doesn't really know what to make of the price of gold midway through 2007.

(Unfortunately, both of these appear to be behind the subscription wall.)

First, the short wondering-out-loud about why gold hasn't gone higher when consumer prices appear to be on the rise everywhere but in reading on core inflation.

Digging for the Reasons Why Investors Don't Rush to Gold
By SCOTT PATTERSON

The dollar is weak, crude oil is back up above $70 a barrel, geopolitical turmoil in the Middle East is on an upswing and economic jitters abound. You would think it would be time to buy gold, but the market doesn't.

Gold is often seen as an attractive investment during uncertain times or as a hedge against inflation. But gold prices have been weak in the past few months, losing more than 5% since nearing $700 in late April. It hit $655 on Tuesday. Shares of gold miners such as Newmont Mining also have lost ground this year, another bad sign.

It isn't completely clear why gold prices are stagnating. One explanation: Core measures of inflation have been modest, even though oil prices are high and food prices are rising. That gives investors less of a reason to own gold as a hedge. Meanwhile, momentum seekers in the precious metal might also be tiring of the trade. Bill Frejlich, a commodity broker at Fox Investments in Chicago, thinks gold could bounce between $600 and $700 for the rest of the year.

On the editorial page, two economists ruminate on the historical relationship between "inflation" and the price of gold.

Money Meltdown
By DAVID RANSON and PENNY RUSSELL

Interest rates are on the rise in the Eurozone, Great Britain and Japan, as well as in India and China. But the Federal Reserve has again elected to keep its target rate on hold despite repeated assertions that inflation risk is still its predominant concern. Are central banks abroad recognizing a threat that their American counterpart has yet to acknowledge?

The Fed seems to believe that inflation has something to do with "excessive" demand. Although it admits that inflation is already running at an unacceptable pace, the majority of its policy officials cling to the belief (or hope) that the U.S. economy is slowing down, alleviating the inflation threat. Both of these assumptions are inconsistent with historical evidence.

What's more, the recent rise in the euro and sterling relative to the dollar has obscured the fact that the world economy has embarked on another classic "run" on paper currencies that is driving inflation up everywhere. For several years now, as was the case in the 1970s, all the world's currencies have been depreciating relative to stable benchmarks such as gold. Since the end of 2001, these declines have ranged from 38% (in the case of the euro) to nearly 60% (in the case of the dollar).

Why then has the pace of consumer-price inflation to date been so much less noteworthy than the pace of currency depreciation against gold? The answer lies in the timing: Gold is a fast-moving leading indicator, whereas consumer-price indices are slow-moving indicators that lag far behind. We all learned in the period between 1975 and 1985 that consumer prices do eventually catch up. It is the size of the move in the gold price, rather than in the consumer price index, that is a true and timely indicator of the magnitude of the inflation problem.

Since at least one individual has already been thoroughly confused by my added commentary today, readers will be provided with no further assistance regarding what to make of this all.