November 9, 2010

Quote of the Day: Goldbuggery

gold coinsFlickr/tao_zhyn (Creative Commons).

From Megan McArdle, on the idea of gold as a hedge against economic apocalypse:

The only scenario I can think of in which it makes sense to stockpile a lot of gold is one where you and your household goods are unexpectedly teleported into the sixteenth century. If you worry a lot about this, then by all means, stockpile gold. But you should also probably take the precaution of stockpiling antibiotics and how-to books on dentistry.

I’ve never really understood the obsession that end-of-the-worlders have with gold. Canned goods, sure. Guns and ammo, sure. But gold? If the country collapses and my bomb shelter is full of food and medicine and electric generators, do you think I’m going to trade any of that stuff to you in return for a few Krugerrands? What kind of idiot do you think I am?

In any case, I wondered out loud a few months ago about the runup in gold prices, which doesn’t make sense as a reaction to our recent financial collapse since the runup started around 2001. Nor does it make sense as an inflation hedge inspired by recent Fed actions, since the runup started in 2001. Nor does Glenn Beck’s recent popularity explain it, since the runup started in 2001. Etc.

What does seem to explain it is that China deregulated gold in 2001, and apparently the Chinese are famous gold bugs. And there are a lot of Chinese. India — which I understand also has a large population — liberalized its gold market in the 1990s, and since then has become a gold sink as well: “In the January-March quarter this year, India was the strongest performing gold market in the world….Gold jewellery demand rose from 37.7 tonnes to 147.5 tonnes….With an estimated 10 million marriages a year taking place in India, wedding-related demand accounts for a substantial proportion of overall jewellery demand.”

So take your pick. Gold prices are going up because of fears that the end times are near, gold prices are going up because of fears of nonexistent inflation, or gold prices are going up because two billion Chinese and Indian consumers are lapping the stuff up. The first two might be playing a role, but I’ll put my money on Door #3. As for how long the runup lasts, don’t ask me. I’d guess it depends mostly on gold demand in China and India, and even in my most expansive moments I wouldn’t pretend to know anything about that. I’m willing to bet that most of the people who bloviate endlessly on the subject don’t either.

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