Gold’s stratospheric run during the height of the economic crisis and its aftermath served as an effective hedge against the possibility of even more disaster to come. It should hold, therefore, that gold’s collapse would signal a vote of confidence in the way markets are currently performing.
Yes and no, Rogoff writes, with typical academic fuzziness.
“To say that the gold market displays all of the classic features of a bubble gone bust is to oversimplify,” Rogoff (left) argues. “There is no doubt that gold’s heady rise to the peak, from around $350 per ounce in July 2003, had investors drooling. The price would rise today because everyone had become convinced that it would rise even further tomorrow.”
The case for buying gold had several strong components, he goes on to explain. Ten years ago, gold was selling at well below its long-term, inflation-adjusted average. The integration of 3 billion emerging-market citizens into the global economy could only mean a giant long-term boost to demand.
“That element of the story, incidentally, remains valid,” Rogoff notes. “The global financial crisis added to gold’s allure, owing initially to fear of a second Great Depression. Later, some investors feared that governments would unleash inflation to ease the burden of soaring public debt and address persistent unemployment.”