Gold – Follow the Yellow Brick Road?
The following is a veritable tour de force by Nicole Foss on the value of gold in a crashing economy, for different people in different circumstances.
Nicole Foss: In light of the rapidly-propagating loss of confidence, and consequent shift to deflation, with falling prices across the board as a result, it is appropriate to review our stance on gold. The yellow metal is often perceived as a panacea – a safe haven guarding against all manner of potential financial disruption. It has long been our stance at the Automatic Earth that this is far too simplistic a position to take. We live in a complex world for which there are no simple one-dimensional solutions. It is important to distinguish between the markets for paper gold and for physical gold, and to understand the risks inherent in gold ownership in order to manage them. As we wrote back in 2009:
Firstly, the goldbugs are right that physical gold is real money (unlike paper gold, which is just another Ponzi scheme). It has held its value for thousands of years and will continue to do so over the long term. However, that does not mean that gold prices cannot fall or that purchasing gold now is the right way for everyone to preserve capital….People’s circumstances are different. Those circumstances determine their freedom of action, both now and in the future.
Bubble Dynamics
It is our view that (paper) gold has been in a bubble which peaked in 2011, along with the rest of the commodity complex. It has been subjected to the same dynamic as other commodities, which have collectively lost touch with their own fundamentals as they have become increasingly over-financialized. Financialization moves the dynamics into the virtual world, while simultaneously subjecting them to perverse incentives. Substantial price movements having at best a tenuous connection with actual supply and demand are the result.
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