Tuesday, September 6, 2011
Paul Krugman has a very interesting post trying to explain the recent increase in the price of gold via a Hoteling type theory. The basic idea is that if the price is going to appreciate at the rate of interest to some final price (at which no-one wants to consume any gold) then if expected interest rates drop, the price of gold ought to immediately rise to account for the fact that the future price appreciation will be slower - his figure above summarizes the idea.
I don't know enough about the supply of gold to know if I buy the applicability of the Hoteling theory (which critically depends on the assumption that the finite extent of the resource is known).
But one point I wanted to make - if you buy this basic scheme as a possibility, then there are an awful lot more commodities in sufficiently short supply that you might try to argue that this kind of effect could be going on there too: copper and oil particularly come to mind. One could try to construct a more general story here about why we have a combination of deflationary pressures in much of the world combined with very high commodity prices.
On the whole I find the "rise of BRIC/decline of the West" type explanations more plausible - but it's worth thinking about other explanations - and of course the situation could be overdetermined with more than one mechanism contributing. Food for thought anyway.