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.
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