Gold Prices: Why Have Gold Bugs Been So Wrong?

July 31, 2012 12:56pm NYSE:GLD NYSE:IAU

Jeff Harding: While I am an advocate of gold investments and gold money, I find that many gold bugs take rather simplistic views of  gold markets, gold investments, and the economics behind it. I saw recently saw headlines from another site which thundered

warnings about an immediate economic collapse or imminent hyperinflation. Many gold bug forecasters have been predicting hyperinflation and collapse — for years. Yet they still trumpet this clarion tune even four years after the biggest economic collapse since the Great Depression. Where have they been? Why have they been wrong? They tell us that it is inevitable; just wait.

Many of these folks claim to be hard money advocates and even quote Mises, the famed Austrian economist and my personal hero, as their source. After all, it was he who talked about the inevitability of the crack-up boom-bust. Things are lousy here and in Europe, so there is little to argue about the failure of contemporary economics and political fixes. But I think many of these advocates of sound money recite the sacred text, but perhaps haven’t understood the sermon.

All of the bad things that they have been predicted could happen. The questions are: will they and when? They predicted hyperinflation. It hasn’t happened. They predicted high price inflation. It hasn’t happened. They predicted social panic and collapse. It hasn’t happened. They predicted gold will go to the moon. It hasn’t happened. They predicted a socialist dictatorship. It hasn’t happened.

It’s far more complicated than they think. GET A FREE TREND ANALYSIS FOR ANY STOCK HERE!

They fail to explain low price inflation and even deflation. They fail to understand that hyperinflation is a political decision rather than an economic inevitability. They fail to explain the “Japanese disease” of stagnation and ZIRP. They fail to understand the impact of malinvestment and the government’s ability to perpetuate it for a long time. They fail to understand the depth of the pool of real savings (capital) here and the ability of the economy to correct its’ mistakes despite a tide of government policies that hold back entrepreneurial and business activities.

And worst of all, they fail to understand the dynamics of the gold markets. This was called to my attention by the reference in Tim Price’s new article (“An Olympian Hurdle“) to the Erste Group’s article, “In GOLD we TRUST.” This research paper was issued a year ago and does an excellent job evaluating the role of gold in history and the economy, explaining the problems behind the current crises, the drivers of gold prices, and just about everything you would want to know about gold if one were contemplating an investment in it.

There is one little problem with their study. They forecast the price of gold would be $2,000 by now.


How could they get it wrong?

Please don’t take this to mean that gold is not a good investment for a lot of reasons, most of which are explained in the Erste report. But if you had followed their advice and bought at the top of the market, you would be down 15% as of today. To make money in anything, you’ve got to have good timing. GET A FREE TREND ANALYSIS FOR ANY STOCK HERE!

This is the problem with gold bugs. They are like the proverbial broken record. I love gold and have invested in it and have made money. Personally, I believe that our market experts here at the Daily Capitalist (DoctoRx and Keith Weiner) have been much more accurate and I’ll listen to them.

Written By Jeff Harding From The Daily Capitalist

The Daily Capitalist comments on economics, politics, and finance from a free market perspective. We try to present fresh ideas the reader would not find in contemporary media. We like to call it “unconventional wisdom.” Our main influences are from the Austrian School of economics. Among its leading thinkers are Carl Menger, Ludwig  von Mises, Friedrich von Hayek, and Murray Rothbard. There are many practitioners of this school today and some of their blogs are shown on the blogroll. We trace our political philosophy back to Edmund Burke, David Hume, John Locke, and Thomas Jefferson, to name a few.

Our goal is to challenge contemporary economic thinking, mainly from those who promote Keynesian economics (almost everyone) and those who rely on statist solutions to problems. We apply Austrian theory economics to investments, finance, investment risk, and the business cycle. We have found that our view has been superior in analyzing and understanding economic and market forces. We don’t consider ourselves Democrats or Republicans, right wing or left wing. But rather we seek to promote free markets and political freedom.

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