# Is gold in a monetary induced bubble? **URL:** \ **Category:** Great Debates\ **Created:** [March 23, 2012, 12:07am UTC](https://boards.straightdope.com/t/is-gold-in-a-monetary-induced-bubble/616563 "2012-03-23T00:07:31Z")\ **Posts on this page:** 19\ **Page:** 2
**Author:** ![just\_some\_guy5](https://avatars.discourse-cdn.com/v4/letter/j/5daacb/32.png) [@just\_some\_guy5](https://boards.straightdope.com/u/just_some_guy5)\ **Post date:** [March 23, 2012, 8:10pm UTC](https://boards.straightdope.com/t/is-gold-in-a-monetary-induced-bubble/616563/21 "2012-03-23T20:10:58Z")
> [@Trom](#): > > 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. Agreed. Was recently looking at the performance of copper ETFs vs. physical copper prices - the correlations were north of 99%. ---
**Author:** ![Evil\_Economist](https://avatars.discourse-cdn.com/v4/letter/e/c89c15/32.png) [@Evil\_Economist](https://boards.straightdope.com/u/Evil_Economist)\ **Post date:** [March 23, 2012, 11:07pm UTC](https://boards.straightdope.com/t/is-gold-in-a-monetary-induced-bubble/616563/22 "2012-03-23T23:07:24Z")
> [@GreenElf](#): > > Here’s a chart for change in M1 and M2 over the past decade: > [File:Changes in US Money supply.svg - Wikipedia](https://en.wikipedia.org/wiki/File:Changes_in_US_Money_supply.svg) The price level is a function of not just the change in the money supply, but also the velocity of money (the number of times a dollar changes hands over some period of time). When the economy is in a recession the velocity of money decreases, so that increases in the money supply aren’t directly linked to price increases. The short version of this: that chart doesn’t tell you anything useful about inflation. ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [March 23, 2012, 11:15pm UTC](https://boards.straightdope.com/t/is-gold-in-a-monetary-induced-bubble/616563/23 "2012-03-23T23:15:29Z")
> [@Voyager](#): > > 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. Of course, gas prices affect the price of everything shipped by truck (meaning pretty much everything you eat, wear or sit on) – don’t they? ---
**Author:** ![Hellestal](https://avatars.discourse-cdn.com/v4/letter/h/3ab097/32.png) [@Hellestal](https://boards.straightdope.com/u/Hellestal)\ **Post date:** [March 24, 2012, 12:02am UTC](https://boards.straightdope.com/t/is-gold-in-a-monetary-induced-bubble/616563/24 "2012-03-24T00:02:49Z")
> [@GreenElf](#): > > 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. We can’t get an accurate picture by picking and choosing one good at a time, or we’re certain to fall victim to [selection bias](http://en.wikipedia.org/wiki/Selection_bias) and only notice the data that fits our preconceived notions. That’s why we have to use general measures, checking lots of things together. If the CPI were the only price index in the world, then perhaps it would be suspect, but there are actually other [measures of inflation](http://bpp.mit.edu/usa/). They show strong correlation. And as previously mentioned, the CPI leaves out house prices, using only a rent measure. This is an attempt to focus, but it can lead to wild divergences between CPI housing and real house prices. Include those lower house price numbers, and CPI-measured inflation would be even lower. Clearly, they’re not making anything up. Prices were down in the aftermath of the 2008 crisis. The inflation rate is now back up around where it was before the crisis. Volatile prices are still volatile. That is pretty much it. ---
**Author:** ![samclem](https://avatars.discourse-cdn.com/v4/letter/s/a9a28c/32.png) [@samclem](https://boards.straightdope.com/u/samclem)\ **Post date:** [March 24, 2012, 12:43am UTC](https://boards.straightdope.com/t/is-gold-in-a-monetary-induced-bubble/616563/25 "2012-03-24T00:43:48Z")
My considered opinion is that gold is in a bubble. Perhaps not as big a bubble as the schemes of old, but still a bubble. I don’t think anyone has mentioned the low intest rate of money. It’s about 1% … So, if you’re a hedge fund manager, there’s no downside to invest your clients money in gold. Well, yes, if gold tanks, but you can’t get your clients any decent return on any safe fixed rate investment, so you plunk some of it in gold. I would suggest that if you could buy some safe investment with a rate of return of 4%, gold would plummet to about $1000. It’ll never go back to the old days of $300-400. US. ---
**Author:** ![GreenElf](https://avatars.discourse-cdn.com/v4/letter/g/9de053/32.png) [@GreenElf](https://boards.straightdope.com/u/GreenElf)\ **Post date:** [March 24, 2012, 1:02am UTC](https://boards.straightdope.com/t/is-gold-in-a-monetary-induced-bubble/616563/26 "2012-03-24T01:02:28Z")
> [@Hellestal](#): > > We can’t get an accurate picture by picking and choosing one good at a time, or we’re certain to fall victim to [selection bias](http://en.wikipedia.org/wiki/Selection_bias) and only notice the data that fits our preconceived notions. That’s why we have to use general measures, checking lots of things together. If the CPI were the only price index in the world, then perhaps it would be suspect, but there are actually other [measures of inflation](http://bpp.mit.edu/usa/). They show strong correlation. And as previously mentioned, the CPI leaves out house prices, using only a rent measure. This is an attempt to focus, but it can lead to wild divergences between CPI housing and real house prices. Include those lower house price numbers, and CPI-measured inflation would be even lower. Clearly, they’re not making anything up. > > Prices were down in the aftermath of the 2008 crisis. The inflation rate is now back up around where it was before the crisis. Volatile prices are still volatile. That is pretty much it. I’m not picking and choosing one at a time. It’s most everything across the board is more expensive. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [March 24, 2012, 6:45am UTC](https://boards.straightdope.com/t/is-gold-in-a-monetary-induced-bubble/616563/27 "2012-03-24T06:45:52Z")
> [@BrainGlutton](#): > > Of course, gas prices affect the price of everything shipped by truck (meaning pretty much everything you eat, wear or sit on) – don’t they? To some small degree, if producers are able to raise prices due to other market conditions. They might not drop prices either if gas goes down. But in any case, it won’t significantly affect basic inflation or deflation. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [March 24, 2012, 6:48am UTC](https://boards.straightdope.com/t/is-gold-in-a-monetary-induced-bubble/616563/28 "2012-03-24T06:48:16Z")
> [@GreenElf](#): > > I’m not picking and choosing one at a time. It’s most everything across the board is more expensive. You said you don’t believe the published numbers on inflation because item X, Y or Z is more expensive. That seems like picking and choosing to me. ---
**Author:** ![Simplicio](https://avatars.discourse-cdn.com/v4/letter/s/c37758/32.png) [@Simplicio](https://boards.straightdope.com/u/Simplicio)\ **Post date:** [March 24, 2012, 7:44am UTC](https://boards.straightdope.com/t/is-gold-in-a-monetary-induced-bubble/616563/29 "2012-03-24T07:44:24Z")
> [@GreenElf](#): > > I’m not picking and choosing one at a time. It’s most everything across the board is more expensive. If only there was some measure that averaged the yearly price increase of a wide basket of consumer goods and services. ---
**Author:** ![Flyer](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/flyer/32/7298_2.png) [@Flyer](https://boards.straightdope.com/u/Flyer)\ **Post date:** [March 24, 2012, 6:46pm UTC](https://boards.straightdope.com/t/is-gold-in-a-monetary-induced-bubble/616563/30 "2012-03-24T18:46:58Z")
> [@Evil\_Economist](#): > > The price level is a function of not just the change in the money supply, but also the velocity of money (the number of times a dollar changes hands over some period of time). When the economy is in a recession the velocity of money decreases, so that increases in the money supply aren’t directly linked to price increases. > > The short version of this: that chart doesn’t tell you anything useful about inflation. You’re making the very common mistake of confusing inflation and rising prices. That chart very clearly indicates inflation over time. The fact that prices haven’t risen any more than they have is a sign of the resiliency of the economy. As a matter of fact, a few prices have fallen despite near-constant inflation. Dollars are like everything else–the more there are of them, the less each one is worth. That’s why prices tend to go up when there’s inflation–it takes more dollars to equal the same amount of value. ---
**Author:** ![Linden\_Arden](https://avatars.discourse-cdn.com/v4/letter/l/53a042/32.png) [@Linden\_Arden](https://boards.straightdope.com/u/Linden_Arden)\ **Post date:** [March 24, 2012, 7:41pm UTC](https://boards.straightdope.com/t/is-gold-in-a-monetary-induced-bubble/616563/31 "2012-03-24T19:41:33Z")
> [@Flyer](#): > > You’re making the very common mistake of confusing inflation and rising prices. That chart very clearly indicates inflation over time. The fact that prices haven’t risen any more than they have is a sign of the resiliency of the economy. As a matter of fact, a few prices have fallen despite near-constant inflation. > > Dollars are like everything else–the more there are of them, the less each one is worth. That’s why prices tend to go up when there’s inflation–it takes more dollars to equal the same amount of value. Since QE began four years ago the US Dollar has gained 11-12% in relative strength as measured by the DXY (from 70ish to 79). At the same time energy input prices have fallen (coal, natural gas, crude oil) and major food commodities have fallen (wheat, corn, soy, rice). I remember rice hoarding at the time. Now certainly all these items are subject to supply/demand pressures that would impact prices more than monetary policy would. Point is this. I don’t see any relation between QE and commodity prices. I do see a relation between GDP and commodity prices. When GDP fell off a cliff in late 08 early 09 commodity prices did too as monetary tools were plied. ---
**Author:** ![ClintO](https://avatars.discourse-cdn.com/v4/letter/c/b5ac83/32.png) [@ClintO](https://boards.straightdope.com/u/ClintO)\ **Post date:** [March 24, 2012, 10:26pm UTC](https://boards.straightdope.com/t/is-gold-in-a-monetary-induced-bubble/616563/32 "2012-03-24T22:26:08Z")
> [@](#): > > Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.-Warren Buffet Gold is an absolute bubble based on fear and not monetary policy. The last 4 years is the most fearful the population has been in recent history, which has drove the price up astronomically. The more the population hears about double dip recessions, the worthless dollar, and inevitable collapse of the economy; they buy up gold like it’ll be the only currency that’ll be accepted in a year. Of course this is not true, but good luck convincing a group of people any different. ---
**Author:** ![Linden\_Arden](https://avatars.discourse-cdn.com/v4/letter/l/53a042/32.png) [@Linden\_Arden](https://boards.straightdope.com/u/Linden_Arden)\ **Post date:** [March 24, 2012, 11:36pm UTC](https://boards.straightdope.com/t/is-gold-in-a-monetary-induced-bubble/616563/33 "2012-03-24T23:36:39Z")
> [@ClintO](#): > > Gold is an absolute bubble based on fear and not monetary policy. The last 4 years is the most fearful the population has been in recent history, which has drove the price up astronomically. The more the population hears about double dip recessions, the worthless dollar, and inevitable collapse of the economy; they buy up gold like it’ll be the only currency that’ll be accepted in a year. Of course this is not true, but good luck convincing a group of people any different. I agree with you. But we have seen plenty of brilliant fund managers buying gold during the same time period. John Paulson and George Soros to name a couple. And most are not bears but instead long equities. Of course even Soros thinks gold is in a bubble. ---
**Author:** ![Jonathan\_Chance](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/jonathan_chance/32/701_2.png) [@Jonathan\_Chance](https://boards.straightdope.com/u/Jonathan_Chance)\ **Post date:** [March 25, 2012, 12:26am UTC](https://boards.straightdope.com/t/is-gold-in-a-monetary-induced-bubble/616563/34 "2012-03-25T00:26:13Z")
> [@samclem](#): > > My considered opinion is that gold is in a bubble. > > Perhaps not as big a bubble as the schemes of old, but still a bubble. > > I don’t think anyone has mentioned the low intest rate of money. It’s about 1% .. So, if you’re a hedge fund manager, there’s no downside to invest your clients money in gold. Well, yes, if gold tanks, but you can’t get your clients any decent return on any safe fixed rate investment, so you plunk some of it in gold. > > I would suggest that if you could buy some safe investment with a rate of return of 4%, gold would plummet to about $1000. It’ll never go back to the old days of $300-400. US. I dunno about that Sam. I can think of at least 10 products I can go into right now that would get me about 4-5.5% reliably over the next 3-5 years. Some of them are tax-free, at least at the federal level. ---
**Author:** ![Hellestal](https://avatars.discourse-cdn.com/v4/letter/h/3ab097/32.png) [@Hellestal](https://boards.straightdope.com/u/Hellestal)\ **Post date:** [March 25, 2012, 1:54am UTC](https://boards.straightdope.com/t/is-gold-in-a-monetary-induced-bubble/616563/35 "2012-03-25T01:54:28Z")
> [@Flyer](#): > > You’re making the very common mistake of confusing inflation and rising prices. That chart very clearly indicates inflation over time. That chart indicates an increase in the money supply over time which, for most people living in the late 20th and early 21st centuries, is not equivalent to an increase in inflation. Inflation is defined by an increase in the price level. Archaic definitions do nothing but confuse people. Learn to live in the now. It’s not a “mistake” to use the correct definition just because you personally like to wear jodhpurs and carry around a riding crop wherever you go. > [@Flyer](#): > > The fact that prices haven’t risen any more than they have is a sign of the resiliency of the economy. As a matter of fact, a few prices have fallen despite near-constant inflation. **Evil Economist** had it precisely right. The fact that inflation hasn’t risen significantly despite the increase in the money supply has to do with the velocity of money, related to money _demand_. > [@Flyer](#): > > Dollars are like everything else–the more there are of them, the less each one is worth. That’s why prices tend to go up when there’s inflation–it takes more dollars to equal the same amount of value. This is not actually true because you’ve left out an important qualification, which absolutely applies at present. You left off the [_ceteris paribus_](http://en.wikipedia.org/wiki/Ceteris_paribus). That’s another old-timey term, but one which happens to be still relevant. The value of dollars would decrease when more dollars are created, _all else held equal_. As it happens, one of the characteristic qualities of a recession is that _all else is not so damn equal, thank you very much_. Recessions are characterized by increases in money demand (decreases in the velocity of money), exactly as was said before. Sharp increases in money demand are actually the cause of the vast majority of recessions. The value of money, like the value of everything else, has to do not just with supply but with supply _and demand_. The velocity of money is a function of money demand. If we increase the quantity of money, and we simultaneously have a massive increase in the demand for money, then we would not expect a spike in inflation (a sharp increase in prices). The “resilience” of the economy has nothing to do with this. It’s just about supply and demand, as usual. Both work together. It works the same way for any other good. I can start my life as a poor painter, selling my works for a meager few hundred dollars. If my popularity explodes, however, the prices of my collected works will also explode, despite the fact that I’m continually increasing the supply of my artworks over time. The Fed expanded the monetary base by about _one trillion dollars_ in 2008, and yet inflation was negative (the price level dropped) in late 2008/early 2009. Supply and demand working together, not just one by itself. ---
**Author:** ![samclem](https://avatars.discourse-cdn.com/v4/letter/s/a9a28c/32.png) [@samclem](https://boards.straightdope.com/u/samclem)\ **Post date:** [March 25, 2012, 2:16pm UTC](https://boards.straightdope.com/t/is-gold-in-a-monetary-induced-bubble/616563/36 "2012-03-25T14:16:35Z")
> [@Jonathan\_Chance](#): > > I dunno about that Sam. I can think of at least 10 products I can go into right now that would get me about 4-5.5% reliably over the next 3-5 years. Some of them are tax-free, at least at the federal level. I can’t think of what they would be. At least with any degree of safety. ---
**Author:** ![Staggering\_Genius](https://avatars.discourse-cdn.com/v4/letter/s/46a35a/32.png) [@Staggering\_Genius](https://boards.straightdope.com/u/Staggering_Genius)\ **Post date:** [March 25, 2012, 10:42pm UTC](https://boards.straightdope.com/t/is-gold-in-a-monetary-induced-bubble/616563/37 "2012-03-25T22:42:09Z")
> [@Jonathan\_Chance](#): > > I dunno about that Sam. I can think of at least 10 products I can go into right now that would get me about 4-5.5% reliably over the next 3-5 years. Some of them are tax-free, at least at the federal level. I would also like to see some of the items on that list, please. ---
**Author:** ![MOIDALIZE](https://avatars.discourse-cdn.com/v4/letter/m/e274bd/32.png) [@MOIDALIZE](https://boards.straightdope.com/u/MOIDALIZE)\ **Post date:** [March 26, 2012, 3:30am UTC](https://boards.straightdope.com/t/is-gold-in-a-monetary-induced-bubble/616563/38 "2012-03-26T03:30:41Z")
LOL @ [the goldbugs.](http://silverdoctors.blogspot.co.uk/2012/03/tungsten-filled-1-kilo-gold-bar.html) ---
**Author:** ![clnilsen](https://avatars.discourse-cdn.com/v4/letter/c/ecccb3/32.png) [@clnilsen](https://boards.straightdope.com/u/clnilsen)\ **Post date:** [April 4, 2012, 4:45pm UTC](https://boards.straightdope.com/t/is-gold-in-a-monetary-induced-bubble/616563/39 "2012-04-04T16:45:49Z")
> [@MOIDALIZE](#): > > LOL @ [the goldbugs.](http://silverdoctors.blogspot.co.uk/2012/03/tungsten-filled-1-kilo-gold-bar.html) I just read some of those comments on the link. Um. Yeah… LOL. Instead of Gold, I’d propose investing in Aluminium for the tin-foil hats being made there. [Previous page](https://boards.straightdope.com/t/is-gold-in-a-monetary-induced-bubble/616563.md?page=1)