Wow, we got lots of great responses to our question in Monday’s Hotline of why gold prices have fallen in recent months. Thanks to all. We learned a lot from reading them.

And the winner of the contest and the reward of one ounce of gold is: Arthur Laffer!

We can already hear you all hooting: “rigged! Insider trading!”

Here is Laffer’s winning explanation:

Gold is first and foremost “the last refuge of the cautious.” Yes, gold is also used in jewelry, art (à la President Trump), electronics, etc. and is also subject to the vagaries of supply disruptions and the substitution effects of other commodities, all of which can affect price.

But the overwhelming reasons for the recent fall in the price of gold are (in no particular order):

i. The recent appointment of Kevin Warsh as the next Fed Chairman.  Like Paul Volcker before him Warsh understands the need for a price rule.   As soon as Volcker adopted a commodity price rule, inflation fell and so did the gold price.

A price rule means intervening in the spot commodity price market by changing the Fed’s balance sheet (e.g. the monetary base) in order to change the trajectory of inflation. Sooner or later stable spot commodity prices will stabilize overall prices and interest rates and gold prices will fall. The need for gold as an inflation hedge will collapse. The rule is, if prices are rising the Fed needs to sell bonds (not buy them as the Powell Fed believes) and thereby shrink the Fed’s balance sheet. Warsh is correct. His appointment will lead to lower inflation, lower interest rates, increased prosperity, and lower gold prices.

If the dollar is as “good as gold,” who wants to hold gold? No one.

Now here is the REALLY good news from Dr. Laffer:

“If I win the gold coin for my answer as to why the price of gold has fallen, I’d like to donate said coin to Unleash Prosperity. To make my donation more valuable, please pay me quickly because if I am correct the price of gold is going to fall a lot more.”