As the future of the price of gold (NYSEARCA:GLD) and the value of the dollar (NYSEARCA:UUP) become less certain, hyper inflationists have ramped up their rhetoric in order to create a rally in gold prices. People like Peter Schiff try to rile up their followers by predicting hyper inflation and therefore that the dollar will go down in value and gold will soar. As Paul Krugman highlights, there has been a major disconnect between reality and the predictions of inflationists. The Wall Street Journal ran a story recently about the accuracy of post-crisis recovery predictions and the results show that the "doves" (those that doubted inflation would take off) predicted the economic recovery much more accurately.
The point I am trying to make is that the gold bugs are starting to beat their drums as loud as possible. Gold prices have had a mild recovery since the 25.5% from 10/01/2013 to 06/27/2013, and the gold bulls are trying to make sure the recovery continues. The point I am going to make here is that the gold bug's rhetoric is the same as it always has been, and the fundamentals that value gold haven't exactly swung in gold's favor (such as supply and demand, or the 4 correlations I found here).
The top story on MarketWatch.com Tuesday, July 30th, is written by Irwin Kellner and is titled Regardless of What the Fed Says, Prices are Rising.
Alright, with that type of title I will bite - show me your conclusive data that proves the Federal Reserve is misleading people about inflation (and please don't give a nod to Shadow Stats). Interestingly enough the article points to no data, no research, no experts, it just sort of rambles.
The two pieces of evidence that prove the Federal Reserve is misleading the public about prices is when Kellner talks about how the Economist magazine announced a change in price and the other piece of evidence is that the "plethora of price hikes began a few months ago. It does not yet show up in year-to-year comparisons, especially those that exclude food and energy." Alright, so where is the graph of those recent months? Of course there isn't one that shows what he is referring to.
When I check the CPI for food and beverages and graph the monthly percent change in price (as the author suggests I don't use % change from a year ago, and stick to percent change month by month). The chart below has me confused about whether or not this inflationist has even bothered to look at the data he is supposedly upset about.
(click to enlarge)Click to enlargeWe see from the graph above that the monthly change in CPIABSL actually appears lower on average than pre-crisis times and it also looks much more stable. Perhaps Kellner has seen the July release before the general public has? FRED only shows through June 2013 and I doubled checked the BLS and they haven't released the July numbers yet.
The rest of Kellner's article focuses on the go to inflationist complaint: core inflation. The Federal Reserve focuses on core inflation targeted so obviously they don't care about food prices. I think this is an exaggeration, this article from the San Francisco Fed discusses why they leave food and energy out from their target. The article highlights the impact that supply shocks like "environmental factors that can ravage a year's crops, or fluctuations in the oil supply from the OPEC cartel." The 1980's saw high energy inflation because of OPEC (something outside of the Fed's power), or the 2012 drought that drove up certain crop prices.
No hyper inflationist article would be complete without a nod to Milton Friedman's famous line "[i]nflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output", and Kellner concludes with the nod. Didn't we see in the 80's that supply shocks can cause inflation? Haven't we seen that post-crisis a large increase in the money supply hasn't given inflation a large bump. "Always and everywhere", well what about Japan who has embarked on QE several times and never has really been able to successfully beat deflation? Are the hyper inflationist ever going to look at the real numbers, or are we stuck in a period of time where dogma allows you to ignore the numbers?
The bottom of the line is that as the economic recovery continues to improve and the Federal Reserve begins to take their foot off the gas in the near future, that gold isn't a good buy. Gold prices will stabilize to their long term averages and those that bought in now will be wishing they didn't.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.