Saturday, January 16, 2010

Martin Feldstein-Maniac

"Many gold buyers want a hedge against the risk of inflation or possible declines in the value of the dollar or other currencies. Both are serious potential risks that are worthy of precautionary hedges. ... But is gold a good hedge against these two risks? Will gold maintain its purchasing power value if inflation erodes the purchasing power of the dollar or the euro? And will gold hold its value in euros or yen if the dollar continues to decline? The short answer is no on all counts. ... Consider first the potential of gold as an inflation hedge. The price of an ounce of gold in 1980 was $400. Ten years later, the US consumer price index (CPI) was up more than 60%, but the price of gold was still $400, having risen to $700 and then fallen back during the intervening years. ... So gold is a poor inflation hedge. Moreover, the US government provides a very good inflation hedge in the form of Treasury Inflation Protected Securities (TIPS). .... Gold is also a poor hedge against currency fluctuations. ... Unlike common stock, bonds, and real estate, the value of gold does not reflect underlying earnings. Gold is a purely speculative investment. Over the next few years, it may fall to $500 an ounce or rise to $2,000 an ounce. There is no way to know which it will be", my emphasis, Martin Feldstein (MF) at Project Syndicate, 26 December 2009, link:

MF, did you lose your mind? Gold is the inflation hedge, see my 2 and 19 December 2009 posts:; TIPS are a good investment? For who? Uncle Sam; not the TIPS holder. Buy TIPS? No bye TIPS, see my 5 October 2007 post: Gold has no underlying earnings, it's MONEY! What is a dollar's underlying earnings? MF, go back to school and study economic history. Try ECON 2239 at Harvard. I found the course number for you! Poor MF. He's so confused he should join Princeton's economics department and consult with luminaries like Paul Krugman and Alan (well-named) Blinder!

1 comment:

Anonymous said...

Professor Feldstein is usually one of my favorites but when I read this Project Syndicate piece in December it confused me... I had the impression it was written as a favor to Zimbabwe Ben Bernanke. Feldstein's usual rigor was lacking.

Some central banks of very strong economies are moving towards gold. And TIPS too...

I guess dollars and treasuries aren't so attractive to the Chinese now... I wonder why that is?