Does the current price of gold represent a bubble as described by ABCT?
I don’t think is fully qualifies. You could say that some (most) people are investing in gold because they expect its price to increase and not because they really want it. I disagree however. I rather think that people are mainly investing in gold because they expect the price of fiat money (paper) to sharply decrease. People want a money that they can use for transactions and that is stable and not subject to inflation, so the demand is real and not artificial. That is not to say however that gold prices cannot go down. In the long run, government cannot control the market against consumer choice, but they might be able to (through heavy taxation on owning gold for example or through propaganda labeling gold owners as evil speculators that are exploiting the people, w/e) manipulate the market further and strengthening the fiat currencies short-term.
In the end though, fiat money is the ultimate bubble as it litterally only has value through government policies. If people realize that their paper money isn’t worth anything (which I’m sure they will in the end), gold (or other PMs) will return to the value it had throughout many of the preceeding centuries.
I think it reflects investor’s doubts about the imminent future.
“Does the current price of gold represent a bubble as described by ABCT?”
I’ll add a word to what the previous poster said. A bubble in ABCT is caused when cheap money makes people invest in something [houses, dot.com stocks, high order caspital goods] they otherwise would not, because they think other people want that something when they really don’t. [Nobody wanted to actually keep a house whose upkeep was more than the rent they were getting, but to sell it to the next guy. Or to own a useless stock, just to sell it to the next guy. The frisbee factory was built thinking people want new frisbee factories to exist, but they don’t.]
With gold, it may be different. Of course it’s hard to read people’s minds about why they want gold, but my impression is that most peole who buy gold want it for themselves. They think it is a valuable commodity that will retain its value in hard times. They are not buying it to sell at a profit, but to keep for as long as the economy they suffer under is shaky, which might be a decade or more as far as they know. Certainly when the Chinese govt encourages its people to buy gold and silver, they mean for them to hang onto it. And when India [I believe] recently bought 200 metric TONS of gold at peak prices, they did it with intent to keep it.
So that people are NOT buying gold because they mistake someone elses intentions, which is what happens in ABCT, but because they reallly want it. And even those who speculate also are NOT misinterpreting the situation. People really do want gold, the more the better.
“They think it is a valuable commodity…”
has golds commodity use found numerous new outlets???
do many coins make their way into jewelry or electronics at all???
of the gold mined does most go into coin or bullion ??
No, no and no. It is being used as money (storage of value).
“store of value”
"cheap money makes people invest in something [houses, dot.com stocks, high order caspital goods] they otherwise would not, because they think other people want that something when they really don’t. "
I thought about these also concerning gold. But are these really exceptions concerning gold as a malinvestment according to ABCT? - especially relative to the popularity and population of gold-related business investment.
What distinguishes a malinvestment from a ‘flight into real value’ as Mises describes concerning goods and inflation?
In both instances individuals acquire goods which they may not have otherwise acquired as a result of intervention. Both cases presume future value.
But is not gold also subject to a bust following the artificial boom suggested by ABCT?
What I am contemplating is a conditon, perhaps further down in a bust period, where gold as a store of value is more abundant and exchangeable than say something like food, water, or arms. Gold would be easily exchangeable but it’s value severly reduced relative to the urgency other scarcities.
What bust possibilities exist for gold when the luster of subjective value is stripped?
In some sense, every kind of homogenous currency (including gold and fiat) represents a “bubble,” since people accept it as valuable, not because they intend to consume it or because they expect that someone else will, but because they expect to be able to pass it off in the future.
The reason why currencies exist, of course, is because they facilitate trade by serving as a common medium of exchange. To this end, gold is not without its inefficiencies - the resources spent in mining gold that only ends up getting buried away in some bank vault are essentially wasted, and it would be better if nobody had to do this. (For all that we might complain about Keynesian “digging-and-filling-holes” policies ) However, until someone comes up with a way of getting all the medium-of-exchange benefits without any of the costs (e.g., an incredibly efficient barter system), there’s no reason to expect that the millenia-old gold bubble will pop in the near future.
Very deep qs.
Value is allways subjective. What you wanted to say is: What bust possibilities exist for gold when the luster of subjective value changes?
In all your reasoning you seem to imply that fiat money and not gold is the natural market state. Nothing further from the truth. We only use fiat money because the goverment is imposing it. Goverment money monopoly is what makes us use fiat money, not the market.
Therefore what its happening now its that gold is returning to its market value. The real question is: Will the goverment be able to force the use of the fiat currency again (wich will send gold price down)? Will the goverment be able to reinflate the dollar bubble again, just like it happened with Volcker in the 80’s?
The answer to that question can only be speculation since nobody is able to see the future, but even if the goverment is able to force the dollar monopolly again, it wont be able to do it in some years, because the debt is too big and the goverment needs to devalute the currency previously to trying to gain monetary control again. Just like the USA had to go through the 70’s and its stagflation before going to the deflationary correction that Volcker provoqued in the 80’s. And during all this years until we see if the goverment is going to be able to keep forcing the monopoly on money, the price of gold is going to go up. In 2 or 3 years we will have to evaluate again.
I don’t know if its a bubble, but I can’t shake the feeling that the “ship has already sailed” on Gold and Silver, and that it will stay relatively stable at around these prices unless a HUGE devaluation of currencies worldwide happens.
Anyone have any input?
“Anyone have any input?”
The way I understand it, gold and silver are like anything else. The price is determined by two things, inflation and demand [since the supply is pretty constant].
Demand: People want more gold if they feel the dollars they now own are not going to retain their value, meaning they won’t be able to buy goodies with their dollars, because the US economy is shakier and will not produce things they want. So they will exchange their dollars for gold. So if you think the economy is doing fine, then you can also assume gold won’t go up because of that. But many think our economic woes are just beginning, because the same mistakes that caused this recession are being repeated on a larger scale.
Of course if you think the euro is going to take a beating because of what’s going on in Greece etc., then the price of gold will go up because people want out of the euro, and some of them will want gold instead.
Same with any other major currency, yen, yuan, you name it.
That’s the demand part of things.
Inflation: Just as inflation makes the price of evrything go up, it makes the price of gold go up. Inflation is caused by govts printing money and spending it, or giving it to banks to lend, and they lend it [or govts borrowing money and spending it]. So if you think this won’t happen for a while, gold will not go up because of that. But Obama has declared that there will be multi trillion dollar deficits each and every year he is in office. meaning inflation awaits.
hugolp - “In all your reasoning you seem to imply that fiat money and not gold is the natural market state. Nothing further from the truth. We only use fiat money because the goverment is imposing it. Goverment money monopoly is what makes us use fiat money, not the market.”
Thank you for pointing this out.
I agree…the market has not really abandoned a gold/silver standard. This may be what prompted me to ask about gold in relation to ABCT.
If the relatively high market value of gold and silver is not really a boom-type malinvestment but a market representation of the subjective value of gold and silver as a store of value against other such alternatives, could it not be said that from a market standpoint we really do still have a gold/silver standard?
Is gold/silver still properly considered a medium of exchange even though it is not ‘legal tender’?
I think that most individuals would accept gold/silver as a medium of exchange regardless of it’s legally declared status.
That, in itself, would seem to exempt gold/silver from the status as a malinvestment in an ABCT boom/bust cycle. Sure, a person may part with more or less of the fiat currency to obtain it, but at some point, that gold/silver is going to have more relative value than it’s fiat counterpart.
If there is a malinvestment aspect to gold/silver it would seem to be in the moral hazard created by inflationary policy - those who get into the gold/silver business to profit from the political process. I think that is where my original question was coming from. Is that really a malinvestment/moral hazard issue or is it a proper market function?
It seems like more of these types of businesses are created to exploit the politically-created profit opportunity than would normally exist if a fiat currency were not used. Granted, there may be more ‘gold exchanges’ or ‘gold banks’ or something like that in a non-fiat currency environment, but those businesses would facilitate market exchanges rather than taking advantage of politcal policies.
…I think that kinda’ goes along with what smiling dave and mahsah were saying too.