Over at LRC, Michael Rozeff has a surprising analysis where he lays out a few convincing arguments that gold prices are too high right now, relative to other prices. He concludes that gold is “overvalued” and that its downward trend may very well continue.
I won’t quibble with his numerical arguments, but I think they are at best irrelevant. Investors care about forward-looking analysis, and I think forces are in place for serious price inflation over the next several years. First, Bernanke truly believes price deflation was the ultimate cause of the Great Depression, and so he will do whatever it takes to prevent it again. Second, Barney Frank and Paul Krugman are openly calling for Keynesian pump-priming to save the economy from disaster. Third, the growth in the monetary base has been absolutely jaw-dropping in recent weeks. (I provide links and a chart for these points in this blog post.)
It’s true, all of these factors could still be reversed. If Ron Paul were elected president, and Lew Rockwell were put in charge of the Federal Reserve, it would be possible that the train could be stopped, and massive price inflation could be avoided.
But with the actual people who will be in power during the next few years? I think high prices are just around the corner…