Are higher gold prices a sign that many investors are expecting the rate of inflation to rise rapidly?
Not necessarily, according James Pethokoukis, columnist with USNews. He summarizes strong evidence that inflation expectations are, if anything, dropping:
Since their peak on September 20, the difference between nominal and inflation-indexed Treasury yields from five to 10 years in the future has come down to 2.57 percent from more than 2.6 percent. This is probably still higher than Fed officials would like, but not in truly worrisome territory.So if high gold prices are not the result of rising inflationary expectations, what is causing them?
I think the real message of gold today, as it has been since 2001, might just be that we live in a world of heightened risk, and gold has always been the ultimate safe-haven investment.
The most recent surge in gold prices comes at the same as time there's been more talk—particularly by the French—of taking military action again Iran if it doesn't abandon its efforts to build a nuke. (Interestingly, the last great gold surge happened during the Iranian revolution in 1979.) ...
After falling throughout the 1980s and 1990s, gold bottomed in 1999 and then began a steady march higher in early 2001. You could interpret that 20-year drop as a sign not only of diminishing inflation but also that the world was becoming a safer place, with less threat of a nuclear war. Likewise, the rise since 2001 and 9/11 is a sign that the world is becoming a dangerous place again.
The fear factor is also at play with stocks. The market's current price-to-earnings ratio is right at its historical average, a strangely subdued state given fat corporate profits and a lengthy economic expansion. Higher gold prices? Blame Ahmadinejad, not Bernanke.