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April 12, 2013

Paul Krugman: Lust for Gold

What explains "goldbuggism"?:
Lust for Gold, by Paul Krugman, Commentary, NY Times: News flash: Recent declines in the price of gold, which is off about 17 percent from its peak, show that this price can go down as well as up. You may consider this an obvious point, but ... it has come as a rude shock to many small gold investors, who imagined that they were buying the safest of all assets.
And thereby hangs a tale. One of the central facts about modern America is that everything is political; on the right, in particular, people choose their views about everything, from environmental science to gun safety, to suit their political prejudices. And the remarkable recent rise of “goldbuggism,” in the teeth of all the evidence, shows that this politicization can influence investments as well as voting.
What do I mean by goldbuggism? Not the notion that buying gold sometimes makes sense..., gold is like a very long-term bond that’s protected from inflation...
No, being a goldbug means asserting that gold offers unique security in troubled times; it also means asserting that all would be well if we abolished the Federal Reserve and returned to the good old gold standard... And both forms of goldbuggism soared after ... the financial crisis of 2008... (although that surge has abated a bit since 2011). But why..., how can we rationalize the modern goldbug position? Basically, it depends on the claim that runaway inflation is just around the corner. ...

Conservative-minded people tend to support a gold standard — and to buy gold — because they’re very easily persuaded that “fiat money” ... created ... to stabilize the economy is really just part of the larger plot to take away their hard-earned wealth and give it to you-know-who.
But the runaway inflation that was supposed to follow reckless money-printing — inflation that the usual suspects have been declaring imminent for four years and more — keeps not happening. For a while, rising gold prices helped create some credibility for the goldbugs even as their predictions about everything else proved wrong, but now gold as an investment has turned sour, too. So will we be seeing prominent goldbugs change their views, or at least lose a lot of their followers?
I wouldn’t bet on it. In modern America, as I suggested at the beginning, everything is political; and goldbuggism, which fits so perfectly with common political prejudices, will probably continue to flourish no matter how wrong it proves.

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