Gold Prices and Political Rationalism

Yichuan Wang wrote an excellent post about what determines the price of gold.  Short answer: not inflation.  Slightly longer answer: real interest rates.  When interest rates are low, the opportunity cost of holding gold instead of financial assets are low, and gold is more in demand.  When interest rates are high, then the opportunity cost of holding onto gold increases and it becomes less worth it.  And while gold is commonly seen as a hedge against inflation, it has historically performed quite poorly as such.  It seems that the question of gold as an asset is actually quite clear…but that just raises a big question for politics.

Have you ever watched Fox News?  It’s worth it for the commercials alone, but both the commercials and the news tell the same story: Ben Bernanke’s reckless money-printing is about to turn the US into Zimbabwe, and you need to protect yourself by BUYING SOME GOLD RIGHT NOW.   Given how persistent these ads are, assume that they’re working and that the most extreme segments of the conservative movement are heavily invested in gold.

So here’s the bizarre question: why is the conservative movement so fixated on tight money?  Think of Ron Paul endlessly yammering about the gold standard, or Rick Perry threatening to lynch Ben Bernanke for his money-printin’ ways.  Even Governor Romney, who surely knows better, made some nods towards monetary tightening. The hard-money argument was a huge winner in the Republican Party in 2012, wildly popular among the same gold hoarders.  But that doesn’t square with a rational model of decision-making.   If we assume that gold is an effective hedge against inflation, a Zimbabwaic hyperinflation will be an unimaginable windfall for these people.  If we instead assume that real rates drive gold value, then inflation will be neutral to their holdings…but the tight monetary policy they demand will devastate it.  Either way, the position of hard-money conservatives towards monetary policy doesn’t square with their economic behavior.  What might be happening?

  1. Scamming: Conservative media are putting one over on the base, who have a poor grasp of macroeconomics.  Fox News and talk-radio hosts are happy to fan the flames of paranoia in order to get gold-seller advertising.  They ratchet up the panic amongst conservative and Tea Party listeners, who demand hard money from their leaders and don’t think about what “victory” would mean for their portfolios.
  2. Blind leading the blind: Neither conservative opinion leaders nor the rank-and-file have any understanding of macroeconomics.  Both the opinion leaders and rank-and-file are heavily invested in gold, and are beholden to various crankish ideas about the value of gold.  These beliefs suggest that gold is a special commodity that is both 1. a hedge against inflation and 2. a completely uncorrelated asset that can do well in every economic environment.  These ideas may seem contradictory because they are.
  3. Cultural Shibboleth: Nobody involved understands macroeconomics at all.  Ron Paul and several other influential people (Glenn Beck, etc) become convinced of the crankish ideas about gold as in #2, staking out ultra-hard money as the rightmost pole of the debate.  Everyone who watches Fox News and listens to talk radio passively assimilates this belief as being a marker of true conservatism without really considering it on the merits.   If you really grilled the rank-and-file, they might superficially espouse the beliefs of #2 but would quickly lapse into incoherence rather than expressing the full stack of goldbug ideology.
  4. Political Intuition: All actors involved are rational and grasp the valuation logic well.  They would prefer hard money to benefit the entire macoeconomy.  However, they anticipate a very low chance of Republican victory in the near future and are moving to capitalize on it.  Basically, conservatives are arguing from the heart…and voting with their wallets.

There must be other good explanations, but these are the main ones I can think of at the moment.  All are subject to pretty clear empirical tests, though differentiating between 2 and 3 is difficult unless you can convince conservative media hosts to disclose their financial holdings.

While liberals like to have a lot of fun with the crankish conservative attitudes towards gold, there’s actually an important question of political economy here.  Namely that there’s a very ideologically active faction apparently basing both political and personal-finance decisions on a model of the world that lead them to fight like hell against their own financial interests.  And not in an indirect “What’s The Matter With Kansas“-type way, but in a “Decrease the Value of My Financial Assets AND NOW” way.  I think that resolving this question can actually tell us a lot about the way that folk economics beliefs are shaped, and how political attitudes can affect seemingly-unrelated decisions about personal finance and investment.

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