Economics Questions

Re: Is gold one giant bubble?

poppies — Thu, 29 Jan 2009 07:08:11 GMT

Just a couple of thoughts:

- Stocks which don't pay dividends also produce no returns; there are many assets which are sought for sheer capital gains (speculation).

- The primary "intrinsic value" of gold is it's typically unrivaled suitability for use as a medium of exchange. It's fairly rare, but not so rare that it can't be used en masse, which provides a nice balance between inflation protection and usability. It's dense, thus it can hold great value in a small space. It doesn't tarnish, rust or dissolve easily (and when dissolved can be reconstituted), so it can hold value over many years. It has a distinct sound, color, luminescence and taste, making forgeries easier to detect. It's safe to handle and very malleable, providing convenience of unit formation. It's fungible, meaning any particular piece of gold can be substituted for any other of the same weight and purity, creating ease of exchange. Gold has great market liquidity because of the historical recognition of it's intrinsic properties as applied to exchange. Finally, throughout time and culture it's often considered beautiful to an almost preternatural degree, begetting a natural desirability.

Any asset can lose value in the eyes of subjective valuers, but since barter is so cumbersome, fiat currency is so inflationary and unpredictable, and other commodities used for exchange are lacking in one or two areas in which gold excels, gold will likely always have *some* value higher than worthless. In this time when fiat currencies are showing their true colors more clearly, it's natural that gold would be gaining in subjective value.

Re: Is gold one giant bubble?

DPatty — Thu, 29 Jan 2009 01:22:46 GMT

Morbo, if you really want to understand why gold has value then I honestly think you should just quickly read this book: http://mises.org/books/whathasgovernmentdone.pdf

It is a very short read as it has large font, and numerous footnotes. It will explain your queries :)

Re: Is gold one giant bubble?

meambobbo — Wed, 28 Jan 2009 07:03:59 GMT

Morbo, when gold was completely decoupled from the dollar in 1971, many economists predicted it would lose its speculative demand, which is most of its demand, and its price would crash from $35 to less than $10. They said gold was a bubble whose day was done. Instead, the price rose to $200 in 4 years and $850 in 10 years.

Why? Because it made a better speculative asset to save than dollars or dollar-denominated assets, whose supply was increasing at unpredictable paces. Gold's supply cannot be changed so easily. It is not destroyed in its consumer uses. Its annual changes are extremely minute compared to its overall stock. Its supply is predictable. This prevents it from being subject to wild supply-side speculation. This is why it was established as money in the first place - when used as such, its demand would literally be the output of the economy, which also was unlikely to experience severe fluctuations in supply or mass consumer value changes.

Today, there is plenty speculation on fiat currencies. This is driven by risk of government collapses which would severely change demand, in addition to risk of supply inflation. The less stable a currency is at predictably securing goods and services, the less valuable it is as a currency.

As hyperinflation shows, even a medium of exchange can be abandoned as a medium of saving. Even without a government collapse and while maintaining legal tender laws, high volatility or unpredictability of the future value of a currency causes it to be abandoned as a form of saving. This drives velocity of circulation through the roof, sending prices skyrocketing. It is a feedback cycle.

For any commodity to establish itself as money, its demand will increase significantly, and its price will rise, given no relative increase in supply. Similarly, if it becomes popular to save/invest in some asset, it's price will generally rise. But just as a bubble can burst, so can the value of a particular currency. Gold is probably exempt from this, because it was the preferred money of a virtually global, virtually free market.

So...some things to consider as to why gold isn't a bubble that will burst. Almost all central banks list gold as an asset backing its currency. Gold has no counter-party risk - if a bank fails, gold won't disappear...if a government collapses, it doesn't matter as it isn't legal tender laws that give gold value but market decisions. in fact, this situation is good for gold, as its reestablishment as a currency would drive up its demand. Finally, gold has proven for most of human history to be a good form of money. In case fiat currencies start crashing, which would happen if the dollar crashes, which it will, gold will be the default money.

For gold to lose all speculative demand, you must find something else that has a more stable supply, no counter-party risk, pre-existing prices, widespread market knowledge, in addition to good money qualities, such as portability, divisibility, durability, and verifiable authenticity. or you must find a way to prevent belief of government collapse AND money supply inflation. ...good luck!

Re: Is gold one giant bubble?

Warren Raftshol — Sat, 06 Dec 2008 23:49:42 GMT

The price of gold is currently being suppressed by unlimited short selling on the Comex. There

is some speculation the Comex won't be able to deliver on its December contracts. Compare the paper gold Comex gold price (around $750/oz) with the actual price on, say BullionDirect.com where ask price is $75-100 above Comex andyou can see this.

Hoarding of value is a practical value for gold/silver

Re: Is gold one giant bubble?

Morbo — Tue, 02 Dec 2008 07:12:33 GMT

CorporateGhost:
There are many arguments against the use of token currency as money,

Sure. But my argument does not rest on proving that this token money is actually superior. Merely that people believe it is superior.

CorporateGhost:
but even if it would eventually be accepted in the market that doesn't mean the gold is currently overvalued.

You're right. I'll concede I misused the term 'overvalued'. However, it does raise the possibility that the price of gold could collapse. To be fair, you guys have conceded this possibility, so there is little left to debate.

CorporateGhost:
If by overvalued you mean the price could fall after the appearance of a new product that serves it purpose better, then everything is overvalued.

Another good point, I guess it adds little to the discussion to describe something as "overvalued."

Re: Is gold one giant bubble?

CorporateGhost — Tue, 02 Dec 2008 06:58:41 GMT

There are many arguments against the use of token currency as money, but even if it would eventually be accepted in the market that doesn't mean the gold is currently overvalued.

If by overvalued you mean the price could fall after the appearance of a new product that serves it purpose better, then everything is overvalued.

Re: Is gold one giant bubble?

Morbo — Tue, 02 Dec 2008 06:33:59 GMT

CorporateGhost:
Are you saying that the concept of marginal utility is not relevant to determine value?

No. I am saying I never disputed the validity of this concept and it was not relevant to bring it up.

CorporateGhost:
And those booms you mention were cause by an expansion of money, since governments don't determine the amount of gold,that is not likely to happened with the gold market.

The booms weren't caused entirely by expansion of money though. People were willing to buy very expensive homes because they believed that in the future they could sell them for a profit even after accounting for interest, maintenance and inflation costs. Part of the bubble was simply the belief that some other sucker would buy the asset of them for more at some point. Part of this folly stemmed from the belief that because the supply of land is finite, it can continue to appreciate indefinitely, just like gold. There are a lot of similarities and they can't be dismissed merely because of one difference.

CorporateGhost:
And yes ,if people stops perceiving gold as a proper medium of exchange it would lose its value, but why exactly would that happened?

Perhaps if a token currency emerged (privately owned, or maybe issued by a government that was for some reason very trustworthy) which people believe to be a better store of wealth than gold.

Re: Is gold one giant bubble?

Morbo — Tue, 02 Dec 2008 06:25:01 GMT

liberty student:
You miss the point. Value is subjective. It's uses do not determine it's value. It may contribute or detract from it, but things are not objectively valued based on strict utilitarianism.

Value is indeed determined by utilitarianism, although as you rightly point out, what gives an individual utility is of course subjective. Gold can be valuable because people think it looks nice and this itself gives them utility. Because of this gold will always have some value even if the current price does collapse. Fiat money will not, because pieces of paper or entries in a database provide no utility at all.

But gold is not currently valuable because most investors actually like anything about gold. It is valuable because investors believe that it will preserve or even increase their wealth and will thus allow them to acquire things that actually do increase their utility in the future.

Tbh, what got me questioning the value of gold was this comment by Warren Buffet:

"(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."

Re: Is gold one giant bubble?

CorporateGhost — Tue, 02 Dec 2008 06:17:58 GMT

Morbo:

I understand this concept perfectly. It is not relevant to my argument.

The market does overvalue things at times due to government intervention. Because of artificially low interest rates and under pricing of risk due to implied government guarantees, shares and property were overvalued for most of the 2001 - 2007 'boom.' They were overvalued because the prices being paid for them did not reflect the returns they were capable of producing.

The same applies to gold. It will be bid up because the government is destroying the value of dollars and people seek a way to preserve their wealth. But in the long run this gold can produce no returns for its owner. It is valuable only as a medium of exchange, and any medium of exchange is susceptible to loosing its perceived value, including gold.

Are you saying that the concept of marginal utility is not relevant to determine value?

And those booms you mention were cause by an expansion of money, since governments don't determine the amount of gold,that is not likely to happened with the gold market.

And yes ,if people stops perceiving gold as a proper medium of exchange it would lose its value, but why exactly would that happened?

Re: Is gold one giant bubble?

liberty student — Tue, 02 Dec 2008 05:54:21 GMT

Morbo:
As I already stated, I mean it is overvalued in the sense that its value is derived from the belief that it will be able to buy its owner something useful in the future, not in any inherent usefulness it possess.

Right, but I don't think you have a basis for that, beyond your own subjective feelings. Or am I missing something?

Morbo:
It's usefulness is not subjective. It has few industrial uses and substitutes available for most of these.

You miss the point. Value is subjective. It's uses do not determine it's value. It may contribute or detract from it, but things are not objectively valued based on strict utilitarianism.

Morbo:
I don't have an anti-gold agenda. I believe precious metals are part of a prudent portfolio and I don't believe that gold will loose significant value in the near future. However, I think its interesting to consider the possibility that at some point, the value of gold could collapse.

Most of us are not investors. What looks good in a portfolio is for someone else to figure out. We're more into concepts like free market money, sound money, full reserve banking, commodity money.

Morbo:
You mention history and tradition as validating gold's worth. I disagree. Nothing inherently valuable has been validated about gold, it merely shows the strength of the belief that gold is valuable.

And the strength of that "belief" has continued to subjectively value it high, whether it is as money, as a collectible, store of value, jewelry, etc.

Morbo:
Will you concede that at some point people could loose faith in its value and the price could collapse?

Sure. I might also die in my sleep tonight. But I wouldn't bet on it.

We're not economic forecasters, alchemists or soothsayers. We're students of rational economics, liberty and the study of human action. Gold is money because people have chosen it to be money millions of times. Maybe there were better choices, but the market is usually pretty good on sorting out the wheat from the chaff. And the market has consistently given gold a thumbs up.

Re: Is gold one giant bubble?

Morbo — Tue, 02 Dec 2008 05:49:14 GMT

CorporateGhost:

You should read about the concept of marginal utility (Carl Menger's Principles of Economics)

Gold is not overvalued since the only way to determine the value of something is through the market. To say that it is overvalued you would have to come up with another way to determine value

I understand this concept perfectly. It is not relevant to my argument.

The market does overvalue things at times due to government intervention. Because of artificially low interest rates and under pricing of risk due to implied government guarantees, shares and property were overvalued for most of the 2001 - 2007 'boom.' They were overvalued because the prices being paid for them did not reflect the returns they were capable of producing.

The same applies to gold. It will be bid up because the government is destroying the value of dollars and people seek a way to preserve their wealth. But in the long run this gold can produce no returns for its owner. It is valuable only as a medium of exchange, and any medium of exchange is susceptible to loosing its perceived value, including gold.

Re: Is gold one giant bubble?

Morbo — Tue, 02 Dec 2008 05:40:14 GMT

As I already stated, I mean it is overvalued in the sense that its value is derived from the belief that it will be able to buy its owner something useful in the future, not in any inherent usefulness it possess.

It's usefulness is not subjective. It has few industrial uses and substitutes available for most of these.

I don't have an anti-gold agenda. I believe precious metals are part of a prudent portfolio and I don't believe that gold will loose significant value in the near future. However, I think its interesting to consider the possibility that at some point, the value of gold could collapse.

You mention history and tradition as validating gold's worth. I disagree. Nothing inherently valuable has been validated about gold, it merely shows the strength of the belief that gold is valuable. Will you concede that at some point people could loose faith in its value and the price could collapse?

Re: Is gold one giant bubble?

CorporateGhost — Tue, 02 Dec 2008 05:24:19 GMT

You should read about the concept of marginal utility (Carl Menger's Principles of Economics)

Gold is not overvalued since the only way to determine the value of something is through the market. To say that it is overvalued you would have to come up with another way to determine value

Re: Is gold one giant bubble?

liberty student — Tue, 02 Dec 2008 05:20:51 GMT

Morbo:
Ok, let's view gold as a medium of exchange. In the long run its still "overvalued".

You keep asserting this, but I don't see you substantiating those assertions. Why?

Morbo:
But what is to stop people from people eventually refusing to accept this relatively useless rock as payment?

Nothing. However, it's "uselessness" is only your subjective valuation. History and tradition (as you have pointed out) have validated gold's worth millions of times over.

Seems to me like you have an anti-gold agenda. Which is cool, but it means this conversation is going nowhere, because I don't think you will be satisfied until you hear something that corroborates your current opinion.

For example, you keep insisting that gold is overvalued, and yet you won't address that the physical stock is in high demand, so high that finding inventory is not easy to do right now. Logic would say that something overvalued would not be trading 20% below the street. That seems to indicate that it is undervalued.

Re: Is gold one giant bubble?

Morbo — Tue, 02 Dec 2008 05:09:04 GMT

liberty student:
I think you are confusing gold as an asset, and gold as a medium of exchange.

Ok, let's view gold as a medium of exchange. In the long run its still "overvalued". It derives most of its value from the belief that someone else will accept it as payment. History and tradition have ensured it has retained its value for a long time. But what is to stop people from people eventually refusing to accept this relatively useless rock as payment?