Paul Krugman’s Rationalization of Record Gold Prices

Here is Paul Krugman's take on today's record gold prices (quote from the Business Insider) [bold emphasis mine]

The logic, if you think about it, is pretty intuitive: with lower interest rates, it makes more sense to hoard gold now and push its actual use further into the future, which means higher prices in the short run and the near future.

But suppose this is the right story, or at least a good part of the story, of gold prices. If so, just about everything you read about what gold prices mean is wrong.

For this is essentially a “real” story about gold, in which the price has risen because expected returns on other investments have fallen; it is not, repeat not, a story about inflation expectations. Not only are surging gold prices not a sign of severe inflation just around the corner, they’re actually the result of a persistently depressed economy stuck in a liquidity trap — an economy that basically faces the threat of Japanese-style deflation, not Weimar-style inflation. So people who bought gold because they believed that inflation was around the corner were right for the wrong reasons.

My comments

This is an example of a biased ex-post analysis wherein facts are fitted into a theory or model.

First of all, Mr. Krugman assumes a causal linkage between gold prices and interest rates without telling us why gold became the preferred choice of investors among the many possible ‘other investment’ alternatives.

Gold’s prices has just simply been assumed as fait accompli.

Second, it isn’t just gold that’s been rising but the precious metals group and most of the commodity sphere. His model has been silent on this.

The S&P GSCI Energy Index (GSCI), Dow Jones-UBS Agriculture sub index (DJAAG) and Dow Jones-UBS Industrial Metals (DJAIN) are all in an uptrend (yeah blame emerging markets!)

Third, Mr. Krugman does not explain why this relationship did not hold true in the 90s where interest rates had been in a secular decline along with the bear market of gold prices.

Neither does he explain how this model worked when gold prices soared along with ascendant interest rates during the stagflation decade of 1970-1980s

Lastly if Mr. Krugman’s analysis is right, then why hasn’t he predicted today’s record gold prices?