5 ms·

It's interesting to note that a lot of gold (40% of annual production) is mined just so that it can be locked away somewhere, without any further utility derive

It's interesting to note that a lot of gold (40% of annual production) is mined just so that it can be locked away somewhere, without any further utility derived from it. This is essentially speculative demand, so one could reasonably argue that gold is in a (many thousand years old) speculative bubble. Central banks could burst this bubble easily by selling off their gold reserves. It is of course very hard to judge how low that would drive the price of gold, but it seems rather clear that the "proper" price of gold should be much lower than it is today. Today, gold isn't used much for industrial production. But part of the reason for that is actually the price of gold. Gold does have useful properties as a chemical element, but engineers specifically design their processes so that they don't need too much of it. How much more use for society could be gotten out of gold in actual production, if the gold price bubble were burst by central banks selling off their reserves, making gold more affordable for industrial purposes? This line of thought is dual to the criticism against hedge funds participating in commodity trading. Once hedge funds create artificial demand for certain commodities such as rare earths by actually storing them in newly built warehouses, the price for those commodities could be driven through the roof, with nasty side cost-push inflation as a side-effect.

dgregd 14y ago
> Central banks could burst this bubble easily by selling off their gold reserves Some central banks already sold their gold http://en.wikipedia.org/wiki/Sale_of_UK_gold_reserves,_1999-2002 http://en.wikipedia.org/wiki/Sale_of_UK_gold_reserves,_1999-...
- bitcartel 14y ago
  Revealed: why Gordon Brown sold Britain's gold at a knock-down price (http://blogs.telegraph.co.uk/finance/thomaspascoe/100018367/revealed-why-gordon-brown-sold-britains-gold-at-a-knock-down-price/ http://blogs.telegraph.co.uk/finance/thomaspascoe/100018367/...) "When Brown decided to dispose of almost 400 tonnes of gold between 1999 and 2002, he did two distinctly odd things. First, he broke with convention and announced the sale well in advance, giving the market notice that it was shortly to be flooded and forcing down the spot price. This was apparently done in the interests of “open government”, but had the effect of sending the spot price of gold to a 20-year low, as implied by basic supply and demand theory. Second, the Treasury elected to sell its gold via auction. Again, this broke with the standard model. The price of gold was usually determined at a morning and afternoon "fix" between representatives of big banks whose network of smaller bank clients and private orders allowed them to determine the exact price at which demand met with supply. The auction system again frequently achieved a lower price than the equivalent fix price. It seemed almost as if the Treasury was trying to achieve the lowest price possible for the public’s gold. It was."
- nhaehnle 14y ago
  Thank you for pointing this out. I believe there are still some good reasons to question whether this is good evidence against the power of central banks to burst the gold bubble. First of all, if you look at the price of gold in real terms at the time of this gold sale, you'll find that it was on the low end, but still went down quite a bit, considering the relatively small volume of the gold sale. Second, speaking about it in terms of volume, around 2700 tonnes of gold are produced every year, while 34000 tonnes of gold are held by central banks, around 18000 tonnes by the US plus European countries. Who would vacuum up that supply? There are two honest questions in this regard: 1) Are there any good models for this type of problem? Basically, what we're asking here is how commodity prices are affected by hoarding of non-users of the commodity. 2) Given that there are discussions of a ban on artificial hoarding on other commodities (e.g. rare earths) in the interest of protecting the industrial and productive use of those commodities, wouldn't it actually make sense to do the same with gold?
  - dgregd 14y ago
    > Who would vacuum up that supply? I guess China would be more than happy to exchange US bonds for gold.
bitcartel 14y ago
> Central banks could burst this bubble easily by selling off their gold reserves. Maybe the bubble is in fiat currency? Imagine in 1933 you had locked one ounce of gold in a box, and 35 dollar bills in another box (that year, the gov valued gold at $35/oz, see: http://en.wikipedia.org/wiki/Executive_Order_6102 http://en.wikipedia.org/wiki/Executive_Order_6102). Unlock the box today. What would you rather have? 35 dollar bills or an ounce of gold which is currently trading at $1,680 ? Gold has been a store of value for thousands of years, while during that time, paper currencies have come and gone.
- jbooth 14y ago
  The only way fiat currency fails is if the global economy goes so far down the tubes that gold isn't worth anything either, compared to nonperishable food and bullets. Take a look at a GDP graph of the 75 years prior to fiat currency and then the 75 years afterwards. It goes from a severe jigsaw into much smaller oscillations. This is because fiat currency allows for counter-cyclical monetary policy, which was universally understood to be a good thing until Obama was inaugurated, and will once again be a universally good thing as soon as we have a different president.
  - danenania 14y ago
    "The only way fiat currency fails is if the global economy goes so far down the tubes that gold isn't worth anything either, compared to nonperishable food and bullets." There are countless examples of fiat currencies collapsing throughout history. It doesn't imply the collapse of civilization, just the collapse of an overburdened government. Governments and banks would like us to believe that civilization will collapse alongside them if we let them fail. It's very convenient for them--they can get away with anything. But civilization has bounced back from much, much worse.
    - jbooth 14y ago
      Sorry, I meant US dollars (the default reserve currency of the world), not Argentinian pesos. The occasional collapse of various small government currencies isn't really a statement on fiat currency, it's a statement on those particular small economies. For fiat currency to fail as a concept, the international reserve currency (USD for now) would have to fail.
martinced 14y ago
"It's interesting to note that a lot of gold (40% of annual production) is mined just so that it can be locked away somewhere, without any further utility derived from it." Isn't it even much, much more interesting that paper money is just paper with fancy colors? And that most of the money in the world are just 0's and 1's residing inside databases? Government do both love and hate gold: the problem is that socialist government can confiscate savings by creating inflation but they cannot confiscate gold (well, non-democratic government can and the US certainly already tried to confiscate citizen's physical gold, but it didn't work out too well). Then you're confusing hedging and speculation in the case of people locking physical gold away. If people were speculating they'd be buying / selling physical gold. People typically don't do that. The ones speculating do it with paper gold. The ones with physical gold typically do hedge. Then central banks already sold lots of gold. Germany is bringing back its gold because the situation is critical in Europe, with a first state that already defaulted and several others which are going to default too. At 25% unemployment in Spain there's simply no way they'll come back soon enough. Their banking sector needs a $400bn bailout or the entire house of (eurozone) cards collapses. Gold is totally undervaluated. Some estimates it could go up by as much as 10x. The reason Germany is doing it now is because it's more than likely that the US lied about the actual amount of physical in the US and they (the germans) don't want to be the fools the day everything crashes. The other reason gold is going to skyrocket is that there are so many buggy financial products linked to gold that are going to be worth close to zero once the shit hit the fan. Paper gold is going to be worth as much as toilet paper. Should that happen, real physical gold would skyrocket. Yet another reason it cannot possibly be undervaluated is that the USD doesn't correspond to market fundamentals anymore: the USD is artificially high and the system is not a capitalist system anymore. The cost of money creation is zero and the system cannot possibly work like that. Governements have already tried to manipulate gold prices by selling huge amount of gold but to no avail. There's however one thing that could bring the price of gold down: a scientific allowing to cheaply create gold. In a way we can do it today, but it requires materials even rarer than gold, so it's not economically practical. I'm personally hedging myself against a major economical SNAFU with about 20% of my savings in physical gold (and 20% in other currencies). Should a real shit hit the fan, I'd still be quite rich compared to most people. That's the thing: it's not speculation. It's an hedge. And, as I'm not speculating, I don't give a flying if the price of gold goes down. Because I don't see it as $ xxx or yyy EUR: I see at "zzz gold". And should a huge SNAFU happen later on, I'll have zzz gold and be quite wealthy. And that's what Germany is doing: hedging against a major SNAFU (like a split-up of the eurozone, hyperinflation in the eurozone and Germany's exit, etc.).

dgregd 14y ago

> Central banks could burst this bubble easily by selling off their gold reserves Some central banks already sold their gold http://en.wikipedia.org/wiki/Sale_of_UK_gold_reserves,_1999-2002 http://en.wikipedia.org/wiki/Sale_of_UK_gold_reserves,_1999-...

bitcartel 14y ago
Revealed: why Gordon Brown sold Britain's gold at a knock-down price (http://blogs.telegraph.co.uk/finance/thomaspascoe/100018367/revealed-why-gordon-brown-sold-britains-gold-at-a-knock-down-price/ http://blogs.telegraph.co.uk/finance/thomaspascoe/100018367/...) "When Brown decided to dispose of almost 400 tonnes of gold between 1999 and 2002, he did two distinctly odd things. First, he broke with convention and announced the sale well in advance, giving the market notice that it was shortly to be flooded and forcing down the spot price. This was apparently done in the interests of “open government”, but had the effect of sending the spot price of gold to a 20-year low, as implied by basic supply and demand theory. Second, the Treasury elected to sell its gold via auction. Again, this broke with the standard model. The price of gold was usually determined at a morning and afternoon "fix" between representatives of big banks whose network of smaller bank clients and private orders allowed them to determine the exact price at which demand met with supply. The auction system again frequently achieved a lower price than the equivalent fix price. It seemed almost as if the Treasury was trying to achieve the lowest price possible for the public’s gold. It was."
nhaehnle 14y ago
Thank you for pointing this out. I believe there are still some good reasons to question whether this is good evidence against the power of central banks to burst the gold bubble. First of all, if you look at the price of gold in real terms at the time of this gold sale, you'll find that it was on the low end, but still went down quite a bit, considering the relatively small volume of the gold sale. Second, speaking about it in terms of volume, around 2700 tonnes of gold are produced every year, while 34000 tonnes of gold are held by central banks, around 18000 tonnes by the US plus European countries. Who would vacuum up that supply? There are two honest questions in this regard: 1) Are there any good models for this type of problem? Basically, what we're asking here is how commodity prices are affected by hoarding of non-users of the commodity. 2) Given that there are discussions of a ban on artificial hoarding on other commodities (e.g. rare earths) in the interest of protecting the industrial and productive use of those commodities, wouldn't it actually make sense to do the same with gold?
- dgregd 14y ago
  > Who would vacuum up that supply? I guess China would be more than happy to exchange US bonds for gold.

bitcartel 14y ago

> Central banks could burst this bubble easily by selling off their gold reserves. Maybe the bubble is in fiat currency? Imagine in 1933 you had locked one ounce of gold in a box, and 35 dollar bills in another box (that year, the gov valued gold at $35/oz, see: http://en.wikipedia.org/wiki/Executive_Order_6102 http://en.wikipedia.org/wiki/Executive_Order_6102). Unlock the box today. What would you rather have? 35 dollar bills or an ounce of gold which is currently trading at $1,680 ? Gold has been a store of value for thousands of years, while during that time, paper currencies have come and gone.

jbooth 14y ago
The only way fiat currency fails is if the global economy goes so far down the tubes that gold isn't worth anything either, compared to nonperishable food and bullets. Take a look at a GDP graph of the 75 years prior to fiat currency and then the 75 years afterwards. It goes from a severe jigsaw into much smaller oscillations. This is because fiat currency allows for counter-cyclical monetary policy, which was universally understood to be a good thing until Obama was inaugurated, and will once again be a universally good thing as soon as we have a different president.
- danenania 14y ago
  "The only way fiat currency fails is if the global economy goes so far down the tubes that gold isn't worth anything either, compared to nonperishable food and bullets." There are countless examples of fiat currencies collapsing throughout history. It doesn't imply the collapse of civilization, just the collapse of an overburdened government. Governments and banks would like us to believe that civilization will collapse alongside them if we let them fail. It's very convenient for them--they can get away with anything. But civilization has bounced back from much, much worse.
  - jbooth 14y ago
    Sorry, I meant US dollars (the default reserve currency of the world), not Argentinian pesos. The occasional collapse of various small government currencies isn't really a statement on fiat currency, it's a statement on those particular small economies. For fiat currency to fail as a concept, the international reserve currency (USD for now) would have to fail.

martinced 14y ago

"It's interesting to note that a lot of gold (40% of annual production) is mined just so that it can be locked away somewhere, without any further utility derived from it." Isn't it even much, much more interesting that paper money is just paper with fancy colors? And that most of the money in the world are just 0's and 1's residing inside databases? Government do both love and hate gold: the problem is that socialist government can confiscate savings by creating inflation but they cannot confiscate gold (well, non-democratic government can and the US certainly already tried to confiscate citizen's physical gold, but it didn't work out too well). Then you're confusing hedging and speculation in the case of people locking physical gold away. If people were speculating they'd be buying / selling physical gold. People typically don't do that. The ones speculating do it with paper gold. The ones with physical gold typically do hedge. Then central banks already sold lots of gold. Germany is bringing back its gold because the situation is critical in Europe, with a first state that already defaulted and several others which are going to default too. At 25% unemployment in Spain there's simply no way they'll come back soon enough. Their banking sector needs a $400bn bailout or the entire house of (eurozone) cards collapses. Gold is totally undervaluated. Some estimates it could go up by as much as 10x. The reason Germany is doing it now is because it's more than likely that the US lied about the actual amount of physical in the US and they (the germans) don't want to be the fools the day everything crashes. The other reason gold is going to skyrocket is that there are so many buggy financial products linked to gold that are going to be worth close to zero once the shit hit the fan. Paper gold is going to be worth as much as toilet paper. Should that happen, real physical gold would skyrocket. Yet another reason it cannot possibly be undervaluated is that the USD doesn't correspond to market fundamentals anymore: the USD is artificially high and the system is not a capitalist system anymore. The cost of money creation is zero and the system cannot possibly work like that. Governements have already tried to manipulate gold prices by selling huge amount of gold but to no avail. There's however one thing that could bring the price of gold down: a scientific allowing to cheaply create gold. In a way we can do it today, but it requires materials even rarer than gold, so it's not economically practical. I'm personally hedging myself against a major economical SNAFU with about 20% of my savings in physical gold (and 20% in other currencies). Should a real shit hit the fan, I'd still be quite rich compared to most people. That's the thing: it's not speculation. It's an hedge. And, as I'm not speculating, I don't give a flying if the price of gold goes down. Because I don't see it as $ xxx or yyy EUR: I see at "zzz gold". And should a huge SNAFU happen later on, I'll have zzz gold and be quite wealthy. And that's what Germany is doing: hedging against a major SNAFU (like a split-up of the eurozone, hyperinflation in the eurozone and Germany's exit, etc.).