The Gold Bubble
I've been wondering a bit about the state of the market for gold. With all the people panicking about the economy and a bit of goading from right wing fear mongers there's been a rush to buy gold. They are told that gold is a safe investment that holds it's value, etc. The trouble is that this isn't precisely true.
Where gold is useful as an investment is a hedge against inflation. Basically if an ounce of gold is say $1000 and the value of a dollar drops by half, the value of an ounce of gold should climb to $2000. Gold's value in this case doesn't change, but it's price goes up relative to the dollar because of the decline in the dollar.
The thing is, gold actually doesn't accumulate any value whatsoever. It's not like investing in a company that can grow in the future. Since it has less application in industrial uses it's not particularly affected by supply/demand changes due to changes in economic activity. So all it's really useful for is insuring that the money you have today is worth the same tomorrow.
So that brings us to the present economic situation. The reality is that our economy's inflation rate is actually dangerously low. While there is some debate about what an ideal rate of inflation is, historically it's tended to be around 2-3% in a healthy economy. Right now we're below that level, which is why the gold rush makes so little sense. In a deflationary or disinflationary (i.e. low inflation) situation gold is pretty much the last thing you'd want to own.
To illustrate how out of whack things are, take a look at this chart:
Notice that big spike in the late 70's and early 80's? That was when we had double digit inflation in this country and so a run up in gold prices made perfect sense. But now look at the ridiculous rise in prices since around 2004. We've seen the price of gold go up by a factor of three in the last few years in a time of low inflation and deflation.
Right now the Fed is contemplating printing even more money in an effort to get the economy rolling again. That's how non-inflationary our situation is. Now, in the long run as the Fed moves to roll back those policies there is some chance of creating some inflation, but that's probably a few years down the road. That would be the time to invest in gold, but now that there's been such a run up in the price that it probably won't make sense even then.
A good rule of thumb I've heard about gold is that, historically, it's always been worth roughly the cost of a decent quality man's suit. It was true back in the 1800's and it's been true through most of the last century. But today with a price of gold up around $1300... well let's just say that's an awfully expensive suit...
Where gold is useful as an investment is a hedge against inflation. Basically if an ounce of gold is say $1000 and the value of a dollar drops by half, the value of an ounce of gold should climb to $2000. Gold's value in this case doesn't change, but it's price goes up relative to the dollar because of the decline in the dollar.
The thing is, gold actually doesn't accumulate any value whatsoever. It's not like investing in a company that can grow in the future. Since it has less application in industrial uses it's not particularly affected by supply/demand changes due to changes in economic activity. So all it's really useful for is insuring that the money you have today is worth the same tomorrow.
So that brings us to the present economic situation. The reality is that our economy's inflation rate is actually dangerously low. While there is some debate about what an ideal rate of inflation is, historically it's tended to be around 2-3% in a healthy economy. Right now we're below that level, which is why the gold rush makes so little sense. In a deflationary or disinflationary (i.e. low inflation) situation gold is pretty much the last thing you'd want to own.
To illustrate how out of whack things are, take a look at this chart:
Notice that big spike in the late 70's and early 80's? That was when we had double digit inflation in this country and so a run up in gold prices made perfect sense. But now look at the ridiculous rise in prices since around 2004. We've seen the price of gold go up by a factor of three in the last few years in a time of low inflation and deflation.
Right now the Fed is contemplating printing even more money in an effort to get the economy rolling again. That's how non-inflationary our situation is. Now, in the long run as the Fed moves to roll back those policies there is some chance of creating some inflation, but that's probably a few years down the road. That would be the time to invest in gold, but now that there's been such a run up in the price that it probably won't make sense even then.
A good rule of thumb I've heard about gold is that, historically, it's always been worth roughly the cost of a decent quality man's suit. It was true back in the 1800's and it's been true through most of the last century. But today with a price of gold up around $1300... well let's just say that's an awfully expensive suit...