Tuesday, March 11, 2008

Gold + CPI = one scary chart



(Note Gold leads here by 8 quarters)

HT: Larry Kudlow's Money Politic$ blog.
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1 comment:

Ardent Economist said...

This is definitely a scary graph if gold is the correct predictor as it has been at other times. Though obviously gold isn't a perfect harbinger of inflation, I find it interesting that it seems to have missed the huge dip in the CPI from '06Q2 to '07Q1. If I'm not mistaken , this time coincided with when the fed funds rate was undergoing steady increases. Maybe gold alone isn't the predictor it once was in the face of increased monetary policy effectiveness over the past several decades.

Gold's predictive power seems to be diminished for another reason. As the current surge in other commodities seems prone to be a self-fulfilling inflation indicator with gold merely getting tangled up in the bunch as people try to hedge with the "only true currency". I think gold stopped being of currency value after the collapse of Bretton Woods. It seems one could simply hold interest bearing assets in other currencies rather than merely a dead store of value that can only appreciate based on the "greater fool" theory. In consideration of this, it would also be interesting to see other broad categories of commodities against the CPI.

Off the top of my head I may be wrong on the Fed funds rate increases, in which case anyone know what lead to this decrease in the CPI? Also, any thoughts on why gold may still have the predictive abilities it has had?

March 12, 2008 at 2:57 AM

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