Gold bubble bursts. What happens economically?

I put this in GD since I don’t know that there is a factual answer for this question. Gold is currently over $1850/t oz. Let’s say that in the beginning of November, people start selling off their gold causing a panic and by the end of the week (to take into account the time lag in the sell off of bullion coins) gold is sitting at $400/t oz. What effect would this have on the economy in both the U.S. and the rest of the world?

Zip.

Longer answer: you might get some mildly stimulative effect because of reduced costs in any industries that use gold as a raw material. But there probably isn’t enough of that to have a noticeable effect on the world economy. And it would probably be balanced out by reduced spending on the part of gold bugs who lost their shirts on the way down.

Therefore zip.

Electronics mfgs use more gold as opposed to substitutes. Otherwise, nothing… Gold as such is not important to the global economy.

Cheaper jewelry leads to more gold gifts?

It would almost certainly expose some fraudulent activity - such as companies selling certificates for gold they did not hold etc. - which would be flushed out by panic selling.

Depending on the regulation of such firms and the financial compensation mechanics attached to that regulation it could have some wider ripples of impact on the financial economy.

But on a macro level globallly I would agree with - zip.

Very little, believe it or not the total volume of gold being traded is small relative to the global economy.

As a bubble, if gold is in a bubble (many think it is), it should be noted that it is still owned by very few investors. Most hedge funds are not extensively exposed to gold, most institutional investors are not exposed to gold, most of the major brokerage houses are not exposed to gold.

A traditional bubble reaches a point where buying reaches a frenzy and the price of the commodity/stock/etc “goes vertical” when that happens everyone is in a race to get in before the “peak” and sell off before the peak, so they can realize massive gains. It is a form of brinksmanship on an economic scale and what happens is some people make a ton of money and a lot more people lose a ton of money when the bubble bursts. Some people have argued gold hasn’t gone vertical yet, so until it does things will probably continue like they are.

It’s also possible gold isn’t in a bubble, just a long period of high valuation, and it could naturally decrease in value slowly or even level off for a long period of time.

I concur with the consensus. Anyone who’s not voting for Ron Paul knows that gold’s role in the economy is so small that its price doesn’t even register on the economy as a whole. You might as well worry about the effect of turkey prices, soap prices, or pet rock prices.

Non-goldbugs will laugh so hard they will cry for days; Kleenex stock goes through the roof.

I think gold is presently priced at about $60 billion dollars per kilotonne. Assuming at most 50 kilotonnes are held as private investments (rather than jewelry) that’s only $3 trillion, and a 67% drop would be only $2 trillion of value.

Compare this with world stock markets which have supposedly lost $25 trillion in the past 4 years. (Is this figure really right? :dubious: Surprises me.)

The U.S. housing bust lost $4 trillion or so, but this had wide impact on many ordinary people.

As other Dopers said, the real crisis from a sharp drop in gold’s value would come if shenanigans are exposed. But in this case smart swindlers were likely betting for the bubble to burst, so any Wall Street swindlers may be OK. (This is good news, as Joe Citizen would be called on to bail out, directly or indirectly, the swindlers.)

Glenn Beck will change his mind about welfare?

A lot of this is still held by national gov’ts that aren’t planning on selling it any time soon. So I imagine the economic impact of a gold price collapse would be even smaller then the 2$ Trillion dollar figure suggests, since the US gov’t, for example, doesn’t really care how much the gold in Ft. Knox is worth.

Wikipedia gives a 165 kilotonne total, so I think almost exactly $10 trillion of gold (at today’s prices) has been mined throughout history. I don’t know how this breaks down (except that special industrial usages in space probes, etc. must be almost insignificant :cool: ). Putting $3 trillion of the $10 trillion in the hands of private investors was a wild guess. (And the definition ambiguous anyway, as much gold jewelry is treated as a long-term “investment.”)

Sorry, I totally missed that you were just counting “private investment”.

1850? It’s profit taking time now. That’s more than twice what I paid for my few coins, none of which have any numismatic value.

The Hunt Brothers caused silver to collapse a few decades ago. It caused people to be suspicious of investing in silver. The silver market has never caught up.
Could gold go that way?
Maybe not, because gold has been a medium of exchange for a long time.
http://en.wikipedia.org/wiki/Silver_Thursday
Here is the Hunt Brothers story. The pricks cost me a lot of money.

So has silver.

The most politically well connected financial institutions involved will have to bailed out by the government because they are “too big to be allowed to fail” and taxpayers will be on the hook for it. Many institutional investors, like retirement funds will loose a bundle, since they won’t sell out fast enough, being institutions.

Mostly the fat cats will have to drink cheaper champaign for a few months, and the middle class will take it on the chin.

Same shit, different day.

Tris

And the winner for knee-jerking, inaccurate and non responsive hysteria is…

Prospectors worldwide stop dancing.