In a recent appearance on Fox News, supply-side economist Arthur Laffer was asked to give his assessment of the global economy after a week of market turmoil due to tariffs and currency devaluation from China. Laffer does not view the United States as having an immediate risk of recession, but he warned that the rest of the world is not doing well economically and this is weighing heavily on the U.S. as well.
Laffer then elaborated on what he views as the most worrying signal for global growth:
The indicator I see that is a problem, that tells me that the world is worried about recessions everywhere in the world except the U.S….is that gold prices are way too high…Gold is the first refuge of the cautious….Gold has been up 250 points in the last year, and that’s a heck of a big increase and a huge risk premium that people are putting on these markets. And that concerns me that they’re not feeling good about the economy or the country or the world.
The recent spike in gold prices is worrying for Americans because it signals that the value of our money is depreciating. As RealClearMarkets editor John Tamny noted for Forbes.com:
So what is true inflation? It seems the answer resides in the price of gold. Used as a money measure for thousands of years, gold achieved its purely monetary role precisely because its role in the productive economy is so minuscule. As a result, nearly every ounce of gold ever mined is still with us, which means gold’s real price is hard to alter thanks to a great deal of gold stock in existence relative to new discoveries.
When the price of gold moves, gold’s price isn’t moving; rather it is the value of the currencies in which it’s priced that is changing. Gold is the objective indicator of inflation: When its price in any currency rises substantially, that means the unit of account is weakening and that we’re inflating. [Emphasis added]
Additionally, Nathan Williamson reported for the American Thinker:
…a recent investment strategy article from J.P. Morgan points out that while the dollar as a share of central bank reserves has been on a steady decline for the last 11 years, gold reserves are growing.
According to the article:
“Central banks across the globe are also adding to gold reserves at their strongest pace on record. 2018 saw the strongest demand for gold from central banks since 1971 and a rolling four-quarter sum of gold purchases is the strongest on record.”
Is this sharp increase in central bank gold purchases a hedge against future global economic conditions? Or is it a byproduct of an unsteady dollar here in the United States? With these trends occurring in the global economy, readers should keep an eye on the price of gold to gauge our economic health going forward.