Blinder and Kudlow on Gold

[For some reason, CNBC's Larry Kudlow showed up quite a bit back at the old blog when it began seven years ago, but, I can't remember the last time I saw him on TV or read any of his commentary. I suppose that can be considered progress. Anyway, Larry and former Fed Vice Chair Alan Blinder were talking about gold when this item originally appeared back on September 21, 2005 and they had a few interesting comments about the metal that, on that day, fetched $469 an ounce but was poised for a move higher, just waiting for a catalyst.]

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Yesterday, the Federal Reserve took another baby step toward safe and sane monetary policy by raising the overnight bank lending rate from 3.5 percent to 3.75 percent. The policy statement acknowledged the devastation caused by Hurricane Katrina, but indicated that accommodation would continue to be removed at a “measured” pace.

While noting that core inflation has been low, that underlying inflation is expected to be contained, and that longer-term inflation expectations remain contained, they acknowledged that higher energy prices have inflationary potential.

Whew!

That’s a lot of talk about inflation - for a moment there it looked like they were going to tell us that we actually had some.

Gold as Kryptonite

It is not often that we tune into CNBC - it is best taken in small doses, abstinence is ideal. Yesterday, we did happen to catch a portion of Ron Insana’s panel discussion after the Fed policy announcement. Former Fed vice chairman and devoted Greenspan worshipper Alan Blinder was one of the guests.

A chart of the historical relationship between real oil and real gold prices was shown. The chart clearly showed the decades long correlation between these two commodities and indicated in a not-so-subtle way that gold would be closer to $1000 than $500 if this relationship had not broken down over the last few years. Barry Ritholtz over at The Big Picture had this chart up the other day - apparently Ron showed this chart last Friday as well.

Hmmm… Perhaps Ron owns some of the yellow metal. Or, maybe he’s just curious.

After a few words about commodities and inflation, Insana asked Blinder a long and tortured question about the Federal Reserve and gold. Here is the discussion that followed:

Blinder: So, I’m not sure what the question was. Are you asking should the Fed be talking about the price of gold?

Insana: Should it be looking at the price of gold as an inflation indicator. Yeah.

Blinder: No. I think it’s time we outgrew gold. The numbers that you just cited show that gold’s been a lousy investment, but that’s kind of beside the point. It’s also not a good indicator of the stance of monetary policy, the state of bank credit, a predictor of inflation, or anything like that.

Judging from this brief discussion, we conclude that gold must be like kryptonite to central bankers - we couldn’t help but notice that at just the mention of gold, Blinder’s multiple facial ticks, already apparent prior to the gold question, quickly intensified and stayed elevated during this exchange.

It was quite odd to listen to a Fed economist, with little control over any muscle on his face, dismiss gold. We wonder if any Chinese or Japanese central bankers were watching.

While we tend to agree that gold has been a lousy investment since 1980, we also acknowledge that it may not be relevant to monetary policy or bank credit. Moreover, we question how good a predictor of inflation it has been or will be - it seems so much depends on how inflation is measured.

However, there is one thing that we are sure that gold is useful in predicting. That one thing also happens to be the title of a catchy REM song from five or ten years ago … the one thing that the gold price surely excels at predicting is - the end of the world as we know it.

Maybe the prognostication has already begun.

“Core” Commodity Prices

Meanwhile, over at the National Review Online, we find that Larry Kudlow has penned another interesting article. Normally, we get right at the business of mocking Larry’s statistical sleight of hand, but we find ourselves caught off guard at the first line in his current offering:

“With gold knocking at the door of $470 an ounce, a degree of uncertainty has crept into the inflation outlook …”

Respect for gold? Like CNBC, Kudlow dosage should be severely restricted, so we don’t know if Larry has a long-standing respect or fascination with gold, but obviously it does not have the same Kryptonite-like effect on Wall Street economists as it has on central bankers.

After waving his magic wand to come up with a few benign statistics - surplus money creation of 1.5 percent and inflation measures of 1.8 and 2.1 percent - he starts making sense again:

“But gold remains a core indicator of future inflation, and the recent spike near $470 an ounce demands attention. Prior to this, gold had traded in a generally narrow range in the past nine months, with a high last Friday of $457.20 and a low of $411.10. The London afternoon fixing price had ranged from 6.3 percent above the nine-month average ($430.06) to 4.4 percent below it. That’s a fairly stable record.”

So, gold is an indicator of future inflation? A “core” indicator? (Thankfully, not a “core” indicator of “core” inflation.) Larry seems to be quite interested and perplexed with the gold price action lately, as are many others in the financial media. Maybe “concerned” would be a better word.

He continues:

“Other real-time indicators also have reflected a non-inflationary monetary environment. Bond yields around 4.25 percent remain at four-decade lows. Spot commodity prices (that exclude energy and gold) have flattened out and stabilized over the past twenty months. The exchange value of the dollar has been gradually rising this year. Even the oil spike is abating. Sweet West Texas intermediate crude is trading around $65 a barrel, 7 percent off its August 30 peak. Unleaded gasoline has plummeted 25 percent.”

We still don’t know how long term yields, the “conundrum”, having confused and confounded legions of analysts and commentators, can still be relied upon to predict future inflation. It seems that while there may be confusion about just about every other aspect of long term bond yields, the predictive value relative to inflation expectations is intact. Is this sound logic or wishful thinking?

And, finally, we get our first glimpse of the future of commodity price reporting. It’s not stated here, but we see where it’s going - if you take energy and gold out of commodity price reporting, you get the “core” rate of commodity price increases, which, not surprisingly are more apt to be … benign.