Here’s a perfect sentence to draw the ire of gold bugs: “But like paper money, gold is worth only what people believe it is worth, and because of this, it is sometimes referred to as the barbarous relic.” Look at all the buttons it presses: comparing gold to paper money! Saying that its value is just as much a convention – or, if you prefer, a “Ponzi scheme” – as that of fiat money! Using “barbarous relic” non-ironically!
That gem comes from a column last night by the Times’s Deal Professor Steven Davidoff, who set out to comprehensively annoy the Ron Paul crowd by arguing that U.S. regulators and exchanges should act to restrict leverage and limit holdings of gold because the metal is in a speculative bubble. The evidence for this includes that hedge-and-speculation demand has doubled in the last two years while industrial-and-jewelry demand is actually down, suggesting that gold is not so much trading on fundamentals. The recommendations:
Yet if regulators are going to stop the next bubble, they will need to act aggressively. Of course, they shouldn’t act in every circumstance, but when we see volatility and speculation as is the case of gold, acting to curb these forces through limiting leverage in cooperation with international regulators would be a prudent course. This would ensure that if a crash does come, it does not have aftereffects on banks and other institutions. Even if the Commodity Futures Trading Commission is hesitant to take such steps, it could, as an initial foray, take to the media to try to “talk down” the speculation.
For our own safety we’re not going to weigh in on whether gold is overpriced or underpriced, or on whether current gold demand is driven by (1) sensible concerns about inflation on the part of savvy investors or (2) Glenn-Beck-driven survivalist freakouts by financially illiterate retail buyers.* We’ll just point out that, if you’re going to have a bubble, this is a really sweet one to have.
Think of our last big bubble, in housing, and the slow-burn current one in European sovereign debt. Here are some bad things that come from bubbles bursting:
Systemic effects when the buyers of the bubble are banks . Or investment banks, money funds, or other quasi-banks. When those things lose lots of money, that’s really bad: financial systems freeze up, real-economy companies can’t borrow or access their cash deposits, and earthquakes and hurricanes and plagues of locust cover the face of the earth.
When Glenn Beck viewers lose their day-trading money, not so much. Gold bugs, as Davidoff points out, skew retail. GLD and PHYS holders are a mix of retail investors, mutual funds, and hedge funds who for the most part are hedging uncorrelated trades. It’s hard to find gold-investor literature that doesn’t sound rugged-invidual-survivalist. When individual investors lose their investing capital, it’s bad for them – but the systemic risks are a lot lower than in a bank-driven bubble.
Overuse of leverage. Banks that held AAA rated subprime or Greek bonds were levered 10, 20 or 30 to 1, with opaque balance sheets that allowed them to defer raising capital when market values for their securities sank. Layering of CDOs allowed further leverage into the system.
The gold ETFs – which are a big piece of whatever retail-driven bubble there is – are U.S. traded stocks subject to fairly conservative margin rules. CME futures leverage is much higher – around 18:1 – but still has daily maintenance, in cash, based on liquid market levels. There are no gold CDOs. There is leverage in the gold bubble/non-bubble, but it’s relatively modest and transparent. A crash would wipe out equity but would not leave a lot of holders owing money.
Overinvestment in debt claims. If you financed housing in 2005-2007, you were driving up housing prices; if you bought Greek bonds in the last few years, you were propping up Greek spending. When those bubbles crashed not only did your asset values fall, but the borrowers still owe you money and are underwater. They have houses worth less than their mortgages, or they have a tax base that is less productive than required to pay back their bonds. That’s a long-term drain as borrowers have to pay back their loans to lenders who can’t afford to write them down. Both sides of the trade are hosed, and for a long time.
But a bubble in shiny yellow metal? If you buy gold and it collapses, no one else is left on the other side of the trade trying to sort things out. You’ve just got some less valuable metal. Go make yourself some cufflinks.
Is gold a bubble? Maybe! But of all the candidates we’ve seen for the Next Big Thing in financial crises – student loans, social media stocks, U.S. treasuries – gold looks like a pretty weak contender.
* In unrelated news a CNBC poll today asks if the U.S. should return to the gold standard. Right now 63% say yes.
How to Deflate a Gold Bubble (That Might Not Even Exist) [DealBook]
person on the internet writes an article about person on the internet who says gold is a bubble
Matt: You're not as lovely as Bess.
I'm just sayin'
- Biff
I love your Cool Water cologne Mr. Davidoff
I really admire your writing style Matt.
We never should have gotten off the wampum standard in this country.
-Peter Minuit
I'm comfortable with you having 10-20% of your retirement in the GLD. I'm confident its almost as safe as Bear Stearns!
- Jim Cramer
gold will stay bubblelicious for as long as the fed keeps monetizing the debt; If helcopter ben ever lays off the crack pipe, the dollar may actually regain some credibility and gold will fall.
matt, you're kind of a “barbarous relic," yourself…
can someone point me to yahoo finance. I'm just looking for affirmation in what I already believe to be true
What? No chart?
Why? Because you say the dollar is worth less and has lost credibility? The fact is that statistically gold has a relatively weak correlation to inflation and is just as prone to levered bubbles as anything else. Sure, there are daily marks, but the leverage still exists, allowing marginal players to inflate the market through paper demand.
The pyschology driver is there but the fundamental driver is not. However, as proven by tulips (futures/leverage), railroads (leverage), '29 stocks (leverage), .bombs (irrationality), housing (leverage), gold seems immune, according to gold bugs, to leverage speculation.
Paper gold is worse than real gold. At least you can throw real gold at people when they come try and take your food in a SHTF scenario. That or you can replace all of your teeth with it and look like a mashup of Mad Max and Paul Wall with yo Grillz!
Armageddon Grillz ya'll!
What gives? I just noticed that this article has no charts or excel spreadsheet.
-Excel Monkey http://powerpivotpro.files.wordpress.com/2010/03/…
My bro-in-law is positive that gold will go to $5,000/oz. He used to be a real estate broker.
something that costs > $1000 an oz to make versus fiat money that costs zero to make? i'll take the former. Gold will be overpriced when all those calling it a bubble finally figure it out and buy some.
Buy gold now or be priced out forever!
Unthoughtful and unfunny jab at Matt for writing anything other than gossip about [Insert Wall Street Personality's Name] and the situation with [Insert Sexual Act] or another riveting X Bank may be contemplating layoffs story.
- Guy that's too lazy to keep registering for new handles every six months.
A bridge to nowhere costs $500mm to make. Does that make it worth more than gold and thus we should build it?
One tenant of "fiat" money is that it has no intrinsic value. Using production cost as a proxy for intrinsic value is asinine.
Does he currently trade derivatives at UBS?
i'll take asinine to the bank. good luck with your fiat
Obligatory response pointing out that this is a Wall Street tabloid of sorts while sucking up to/defending Bess Levin (likely typed with one hand).
-Headless Horseman
P.S. Yes, I replied to my own comment above. You're so smart!
As the richest duck in the world, substantiated by the vast accumulation of gold in my vault, I side with the gold hoarders because I have a good understanding of their psychology. But let me tell you this: I'd trade it all for my "Number One Dime."
When I trade my land, gold/silver bullion, gun/bullets into the FEMA center can I get a double helping of the Illuminati RFID chip ;)
24KT AG the NKI!
How the f'k did you know?
> $1,000 / oz to make ?!?
For someone who sounds like a gold bug you sure are retarted. Wait….. nevermind.
i will give you 6 word answer = GOLD STILL LOW ON INFLATION ADJUSTMENT
I definitely heard that at a Paulson & Co. annual meeting.
-Recovering FoF'er
What about silver?
-Wm. Jennings Bryan
Well then there is no pleasing you!
-Johan van der Smut
TLDR
I thought this was supposed to be a humor site?
Stupid comment considering Bess does a lot more than the stuff you tried to box her into above but you keep winning it, okay?
Hey remember last year when all you ever did was leave comments about how all the other commenters here suck and you hate them…and then you went away and/or STFU for a while? Why can't we go back to that?
Through my extensive and in-depth analysis of recent DB comments I was able to establish that an approximate 83% of the comments ending with a single or multiple exclamation points have tendency of skewing towards retarded. I'd have to get back to you with the stats on the use of emoticons.
Put asinine in one hand and shit in the other. See which fills up first.
what exactly don't you understand? certainly not what money is. How can you expect to accumulate any when you don't even understand what it is?
Do you work for UBS?
Unless you're getting your gold from the moon or the bottom of the ocean $1,000 / oz is an egregious estimate. I would expect someone with as much conviction as you seeminlgy have to at least possess some basic knowledge about the subject.
If you end up making some gold this week then email me and I'll check it out and perhaps buy some from you.
killyourself@gmail.com
zzzzzzzzzzzzzzzzzz……
what is the deal with the lack of a 3x levered gold etf? and 3x inverse, while we're at it.
I agree. It's all a bubble. That's why I am planning for my future.
-guy who is putting all his money into farming
I generally stay out of gold nuttery, but +1 on the UBS crack
hey genius, price is set by the marginal cost. all in marginal cost of producing gold is easily $1k per oz. Actually figure is pretty much higher.
sorry if you need everything to be exactly literal. I'll be more precise for you next time.
Assuming your logic is correct:
P=M: Price equals marginal cost of production
M=C: Marginal cost of production equals $1000/oz
By the law of syllogism:
P=M, M=C, therefor P=C
Price = $1000
I'm pretty sure the breakdown of this relationship defines most bubbles, eg existing housing selling above replacement cost in 2006. Yor logic, terrible as it is, doesn't support your arguement.
News to us.
- Barrick, Newmont, and every other gold company on the planet.
And what's the deal with airline food?
Pork bellies and orange juice
-Mortimer
Ashley hymson is New york biggest loser! Also known as the world biggest fraud, and is wanted?
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