Gold and Inflation

Federal Reserve Chair Ben Bernanke last week dismissed the suggestion that the recent surge in gold prices signals some kind of inflationary pressures:

So gold is out there, doing something different from the rest of the commodity group. I don’t fully understand the movements in the gold price, but I do think that there is a great deal of uncertainty and anxiety in financial markets right now and some people believe that holding gold will be a hedge against the fact that they view many other investments as being risky and hard to predict at this point.

I think Bernanke has this exactly right.

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Source: Ino.com

During the last two months, gold prices have surged while prices of most other commodities fell like a rock.

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Source: Ino.com

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At the same time, we’ve seen yields on 10-year U.S. Treasuries coming down impressively as well.

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Source: FRED

But those lower interest rates have brought no cheer to equity markets.

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Source: Ino.com

There’s a common thread to all the above figures, and it’s not fears about inflation. Instead it’s worries about the level of real economic activity, showing up in a flight to safety. U.S. Treasuries remain the instrument of choice for investors who think nothing looks safe.

But with the long-run fiscal challenges facing the United States, are 10-year Treasuries really the safest place to put your money? The yellow metal seems to be one way some people are hedging that bet.

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Originally published at Econbrowser and reproduced here with the author’s permission.