Ken Rogoff on rising gold prices and public debt:

“At $1,300, today’s price is probably more than double very long-term, inflation-adjusted, average gold prices. So what could justify another huge increase in gold prices from here?

“One answer, of course, is a complete collapse of the U.S. dollar. With soaring deficits, and a rudderless fiscal policy, one does wonder whether a populist administration might recklessly turn to the printing press. And if you are really worried about that, gold might indeed be the most reliable hedge.”

Indeed, Ken Rogoff and Carmen Reinhart’s new book, This Time Is Different: Eight Centuries of Financial Folly, discusses the idea that governments often resort to forcibly converting indexed debt to non-indexed debt and thereby purposively inflating away the value of government bonds. The United States did it in during the Great Depression, so its not unreasonable to suspect it could happen again.

Rogoff thinks that one primary reason for gold’s sustained high prices these days is the increased global demand and purchasing power from emerging markets. But he does go on to mention that gold prices tend to be “extremely sensitive to global interest-rate movements” because it doesn’t pay interest and is costly to store. But in today’s investing climate with interest rates at rock-bottom in many places, the cost of speculating in gold has fallen relative to other investments like bonds.

(HT: Greg Mankiw)