Posts Tagged ‘Gold bug’

The recent falls in the price of gold have been a puzzle; contradictory forces are at work.

The main trigger for recent falls has been talk that Cyprus is set to sell gold holdings. Yet the rationale behind Cyprus’s move is that it is virtually bust, and usually when countries go nearly bust, gold rises in price. A number of media reports has suggested that even money in our banks accounts is no longer safe, and that governments across the world are effectively insolvent. These are usually seen as reasons to buy gold.

Maybe the truth is that markets don’t believe all those predictions of doom. QE is usually associated with gold rising in price, but if markets think Japan’s QE will lift its economy, then that may be a reason to sell gold.

This article is really worth a read: 12 Rules of Goldbuggery  It’s a touch ironic. The bottom line, if you want the précis, is that gold bugs, as they call out-and-out fans of buying gold, are not totally rational . If gold falls in price they say it is because of market manipulation. Indeed they say if the markets were left to themselves gold would only ever rise. And they add that it is inevitable that the world will return to the gold standard.

Here is a thought about all this so-called goldbuggery. If the world did return to the gold standard, the global economy would soon afterwards descend into depression from which it would not exit until the gold standard was ditched. It is not true that inflation does not occur when the gold standard is in place. And it makes no sense to limit the money supply to the stock of gold, which is totally unrelated to innovation and economic potential. A return to the gold standard would kill innovation, crush change, and protect the status quo, making it easier for the rich to stay rich and harder for the poor to gain wealth.

Finally, Warren Buffet had something good to say about gold. “What motivates most gold purchasers is their belief that the ranks of the fearful will grow,” or so said the wise man of investing last year. He added: “During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As ‘bandwagon’ investors join any party, they create their own truth — for a while.”

He also once said: “If you put your money into gold or other non-income- producing assets that are dependent on what someone else values that in the future, you’re in speculation…You’re not into investing.”

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