This is two-part debate. Is gold in a bubble and is that bubble due to monetary policy?
I say it is classic market-driven mania like that described by Charles Mackey in Extraordinary Popular Delusions and the Madness of Crowds
(Wikipedia)
Manias have long existed and predate central banks so I see no evidence that monetary policy is their cause. It seems odd that one asset would bubble when prices in general are depressed.
It’s a bubble alright, but one driven by fear more than monetary policy IM(economically ignorant)O. Basically, it’s being used as a hedge against perceived monetary and economic issues and problems, but I think fear is still the root.
-XT
Supposedly a lot of the increase in the last few years is from China lifting a previous ban on allowing its citizens to own gold. As the Chinese are big savers while at the same time China has a recent history of instability and corruption making investing in more intangible assets less tempting, I don’t have any trouble believing they’re buying enough gold to drive up global demand.
In which case I’d say its not really a bubble, at least in the usual sense.
Excellent tip.
This Forbes article explores China’s demand for gold recently despite the fact they are the world’s largest producer. There is trouble in China it seems.
The appreciation in gold is mainly because the money supply is being diluted to pay for the wars and corruption. Politicians don’t like to openly tax voters so they inflate the money supply, which is a hidden tax.
Monetary policy helps explain why dollar values versus gold values look so skewed, but it doesn’t drive demand for gold. Gold is a very popular “bad stuff is going to happen” commodity. It’s not always necessarily the case, but gold demand right now is a good way to measure how well people trust governments to solve their problems. The gold “bubble” will “burst” when people start believing that their governments are competent. For us in the US, when/if people believe that two political parties can actually co-exist again.
Of course, the fact that commercial gold sellers spend a lot of money advertising to people already willing to buy into conspiracy theories isn’t helping matters.
The economy is the exchange of goods and services between people, groups and nations. Money is the stable reference point that we use to value these exchanges. With fiat money we can now move that reference point to avoid difficulties in the economy by creating as many new dollars as we need to keep the debts growing. This is the flaw with this Keynesian idea. That is as we move the reference point of dollars, it separates from its function in the real economy as a stable reference point. At the end of the day the exchange of goods and services always wins over any currency that is not been kept as a stable reference of value. Today all currencies are heading in this direction.
Paper gold, contracts for gold and ETF’s are all in a bubble but physical gold being the metal itself is not because it is in itself the most money like physical reference point that we have. The functional change that is coming will settle the debt crisis worldwide and physical gold value will actually increase an order of magnitude to provide final settlement of as close to objective value as one can get.
“And since gold production cannot be ramped up to meet demand like it can in bubblicious items, there is no reason for gold to fall back. Gold mining does not debase gold in the same way that dollars, tulips, homes, Dot Com IPO’s or government bonds are debased through production. Mine production is taken from known reserves that are already valued, owned and traded, and all gold on the planet Earth is a fixed amount, the same fixed amount it was a million years ago. All we do is move it around, like poker chips on a table, to those savers that value it the most.”
I’m not sure how much of the current gold fever we can attribute to bubblicious behavior. Some of it, sure, but as others have said, a good guess is stronger gold demand from Asia. It’s a big complicated market, there are a lot of potential forces at play, but those prices might stay relatively high for the long haul rather than crashing back down.
You might want to compare the inflation rate in the 1970s and early 80s with the current inflation rate before offering this argument.
You might want to compare the inflation rate in the 1970s and early 80s with the current inflation rate before offering this argument.
I’m not so sure the current reported rate of inflation, or measures of the money supply, is accurate. The price of gas was barely over a dollar ten years ago. Food, education, and many other staples have significantly risen in price as well.
Gas, gold, and education are all things which have risen much faster than the inflation rate over the past 10 years. When you look at things that aren’t outliers, like housing costs, food, automobiles, clothing, or just about anything else, it’s plain to see that gold is not linked to actual rates of inflation, but rather perceived inflation fears. The reported inflation rates are indeed accurate.
Hasn’t rent gone through the roof? I just read an online article that the less well-to-do are being priced out of their rentals. The minimum wage has steadily risen, but according to many, not enough to keep up with inflation.
Indeed, but I will point out that at least for gas, the price has experienced severe down swings, too (like towards the end of 2008/beginning of 2009). Food prices also deflated quite a bit in this time period.
Related to this point is the fact that people are horrendous at remembering things like falling prices but “remember” rising prices pretty well (even when it doesn’t happen).
Depends on where you’re talking about. I’m sure it’s true for some cities, but it’s certainly not true everywhere. Do you want to post the article? Or even just show the numbers? With the massive deflation we saw in energy and food prices in 2009, you could argue average prices in 2009 lower than in 2007. That’s why we try to leave more volatile prices out of these figures. They skew short term results without giving much useful information.
Also, “minimum wage has steadily risen”? What? Minimum wage has not steadily changed at all. The minimum federally mandated level (cities and states may set theirs higher) had a graduated change from $5.15 in 2007 to $7.25 in 2009. It was $5.15 from 1996 to 2007, and it’s been $7.25 from July 2009 until now. That’s hardly a “steady rise”.
Maybe if you actually looked at the numbers, rather than making assumptions that all prices are increasing, it would help.
Was at an academic function last year and one of the speakers ran a $10bn+ hedge fund that held gold worth ~5% of its total assets. Someone asked about the gold investment and whether it was being used as an inflation hedge. Interesting, the hedge fund manager responded that he did not think gold was a particularly good hedge against inflation, but that he did believe it was an excellent hedge against the general public’s fear of inflation.
Here’s the article for rents.
http://realestate.msn.com/looking-for-an-affordable-rental-market-study-says-youre-out-of-luck?page=0
Its also driven by more demand for gold as an investment. For a long time commodities like gold could not be part of a mutual fund’s portfolio. Now it can (at least for the time being) and people are suing it as part of a diversified portfolio. People have already mentioned that China is buying gold and buying gold is largely a matter of Chinese people diversifying their assets as much as their situation allows. You don’t really want to hold all your wealth in speculative Chinese land or Red Chip stock so you buy gold.
That would show us as inflation across the board and we have not seen this.
Yes, rentals in my area have risen, but house prices have dropped. Why do you choose to talk about one and not the other. And during the housing bubble rental prices had fallen, and many apartment complexes were offering free rent for a month to attract renters. You can’t cherry pick specific items and construct an inflation rate on them.
The actual inflation reports distinguish volatile commodities - like gas - from more stable CPI components. Deflation fears a few years ago were not due to the huge drop in gas prices, so that goes both ways.
That treasuries have recently inched up over 2% (thanks to good economic news) shows that fears of inflation are widely overblown.
Here’s a chart for change in M1 and M2 over the past decade:
Gold has some inherent value as jewelry, for dental work and in electronics. But when most of something’s value is due only to perception that it will get more valuable (like beanie babies) you are in a bubble situation. My class ring, which is a lump of gold I bought when gold was $35 an ounce, is worth tons more now, which makes no sense.
When nitwit political commentators of any stripe and your Uncle Harry start talking wisely about investing in something, you have a bubble.
When I called the auto insurance company to complain about the premium increase, they said it was an adjustment for inflation that would affect all customers. And it was more than just a 5% increase. The cost of medical care, eyeglasses and car repairs has risen too. The housing bubble deflated, but I can’t see much else going down in price.
Have a cite that “paper” gold products differ from the underlying physical? Things like the gold ETF, GLD, are extremely efficient. If ETF share prices are too high relative to the net asset value of the fund, the creation/redemption feature of ETFs allows large market participants to exchange gold for ETF shares. They will do this and sell the ETF shares on the open market until the ETF trades inline with the underlying.