Friday, July 25, 2014


Crossing Wall Street - the gold model revisited. Sigh.

No, really. Sigh. I'm tired of this shit. I'm tired of stupid White people and their arrogant America-centric, paleolithic pre-Nixon magical thinking about gold.

OK, here goes:

The key to understanding the gold market is understanding that it’s not really about gold at all. Instead, it’s about currencies, and in our case that means the U.S. dollar. Properly understood, gold is really the anti-currency. It serves a valuable purpose in that it keeps all the other currencies honest—or exposes their dishonesty.

Um... so gold has nothing to do with mined supply, scrap, investment demand and EM physical demand? Supply and demand don't matter? It's not a market with buyers and sellers?

So when the price of gold halved from 1980-2000, that had nothing to do with a doubling of mine production from the introduction of leaching while demand remained constant? And the gold price skyrocketing after 2000 has nothing to do with production increasing too slowly (or some years even standing still) while EM demand for gold increased due to massive new wealth creation?


This may sound odd, but every major currency has an interest rate tied to it. It doesn’t matter if it’s the euro, the pound or the yen. In essence, that interest rate is what the currency is all about.

OK. So you're going to talk about interest rates other than the US interest rate, right? Cuz US gold demand is a fraction of Indian or Chinese demand. India and China together consume 9 times the gold that the US does. Why the hell should the US, UK or Japanese rate matter to gold? So you're going to talk about rates in India and China, where gold is actually consumed, right?

No. No, of course not. You're not going to talk about interest rates in India and China, are you? You're not, because like every other Wall Street Whitey, you only have one country in your model. You think only America matters to the price of gold. Because America.

We’re getting closer to our model, but we need to take yet another detour, this time to Sweden to discuss the great Swedish economist Knut Wicksell. Wicksell was an interesting character who wrote on many topics, but he was deeply concerned with the theory of interest rates.

Now Wicksell was an economist, and consequently he wasn’t always the clearest writer. He often seemed to get his interest rates confused. One economist referred to this as the “Wicksellian muddle.” But what’s important is that Wicksell believed there was a constant tug-of-war between two interest rates. One is the interest you see in the real world, the money rate. The other is an invisible phantom rate called the natural rate. While unseen, this natural rate does make its presence known in various ways. Wicksell believed that when the money rate drops below the natural rate, the economy grows and prices rise. When the opposite happens, the economy contracts and prices fall.

I believe that if we take the Wicksellian natural rate and view it through the prism of a still-functioning Gibson’s Paradox, we can understand how gold’s value works.


Here’s how it works. Whenever the dollar’s real short-term interest rate is below the Wicksellian natural rate, gold rallies. Whenever the real short-term rate is above the natural rate, then gold falls. Just as the Knut Man describes. When gold holds perfectly still, you know you’re at the natural rate. It’s my contention that this was what the Gibson Paradox was all about, since the price of gold is tied to the general price level.


The definition of the Wicksellian interest rate, according to Krugman anyway, is "the rate that would lead to full employment in a Keynesian model; keeping rates below that level leads to inflation, keeping them above it leads to deflation." It's essentially a make-believe number that nobody can actually calculate at any time.

You might as well be trying to explain the price of gold with reference to the luminiferous aether or phlogiston.

You're also obfuscating, apparently, the fact that a Wicksellian rate would be entirely different in every country in the world. Have you tried addressing this?

Whenever the dollar’s real short-term interest rate is below the Wicksellian natural rate, gold rallies. Whenever the real short-term rate is above the natural rate, then gold falls. Just as the Knut Man describes. When gold holds perfectly still, you know you’re at the natural rate.

Compare what you just wrote to what Krugman wrote, above. Your Wicksellian natural rate is a variable that you can cut out of both sides of the equation. You're saying when there is inflation gold goes up.

It's just that now you're using a make-believe theoretical number that nobody has any way of calculating in order to hand-wave away the noisiness of the relationship.

So all you're establishing is that commodity prices go up relative to a currency that's seeing high inflation.

Do you ever bother to stop and think about these things before you commit them to the internet?

I would also imagine that at some point, gold could break a replacement price where it became so expensive that another commodity would replace its function in industry, and the price would suffer.

OMFG Eddy, are you saying gold is being used in industry? My god, are you trying to build a model for the gold price without first getting yourself the slightest goddamn clue about gold supply and demand?

That's it. I can't spend any more time on this article. Eddy Elfenbein might be a really smart guy who's really good at other things, but I think he's failing the gold analysis because he's completely White-ass pig-ignorant about gold.

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