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Is the Price of Gold a Barometer for the Global Economy?

What's the Latest Development?

Through the worst portions of the global financial crisis, the price of gold skyrocketed from $300 per ounce to $1,900 as investors looked for a foothold in the rocky economic terrain. But now that gold is falling, the reasons for investing in it remain about the same: "Ten years ago, gold was selling at well below its long-term inflation-adjusted average, and the integration of three billion emerging-market citizens into the global economy could only mean a giant long-term boost to demand. Lately, of course, the fundamentals have reversed somewhat... China’s economy continues to soften; India’s growth rate is down sharply from a few years ago."

What's the Big Idea?

Like any other market good, the price of gold fluctuates far above and below its fundamental long-term value, notes Harvard economist Kenneth Rogoff. Therefore, it should not be considered a general barometer of economic performance. "So the recent collapse of gold prices has not really changed the case for investing in it one way or the other. Yes, prices could easily fall below $1,000; but, then again, they might rise. Meanwhile, policymakers should be cautious in interpreting the plunge in gold prices as a vote of confidence in their performance."

Photo credit: Shutterstock.com

Read it at Project Syndicate

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