Here is some interesting commentary from Willem Buiter, CitiBank’s Chief Economist:
“The gold bubble, is, of course, pretty impressive … It has had a positive value for nigh-on 6,000 years. That must make it the longest-lasting bubble in human history
….
Even though I view gold as a pure bubble, that bubble may well be good for another 6,000 years … investing a vast amount of money in something whose value is based on nothing more than a set of self-confirming beliefs will make for an exciting ride.”
This will sound pretty familiar to anyone who’s read my book or read some of my commentary on gold. Gold, in my opinion, is a standard commodity with some intrinsic value as far as its industrial usage, however, it commands a price premium due to its usage as a currency. That is, there is a price premium in the price of gold due to people’s belief that it has value above and beyond its industrial value. I don’t know what the value of this premium might be, but here’s some perspective on how the price of gold often commands a premium over commodities:
So, is Buiter right that gold is in a historic bubble? I think we have to be careful with the term bubble because it implies that the current price is unsustainable. But I do agree with Buiter that the price of gold is based, to a large degree, on an irrational belief in its value as a currency. This doesn’t necessarily mean it’s in a “bubble”, but it does mean there is some potential risk in its value in the case that people were to believe, like I do, that the future of money is in electronic money and not physical forms of money.
Of course, it doesn’t matter much what I think. It only matters what the market thinks. And if the market disagrees with my opinion then my opinion is meaningless as it pertains to gold’s actual value. And as long as people continue to believe that this yellow metal has value as a currency then it will continue to have value as a currency. And given the amount of persistent fear over the sustainability of fiat money and governments I don’t see any reason why this belief will cease any time soon.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.