Thursday, August 18, 2011

Gold bubble is less likely because of the high money demand (Low Liquidity)

There is a concern of the gold bubble. But, it has been predicted that the gold bubble is less likely to happen.

The reason why is that the money demand is still high in global market compared to 1970s, the period that the gold bubble occured. In 1970s, the real value (taking a consideration of the price inflation (The relative depreciation of the money, and the relative appreciation of gold)) of gold became significantly higher than the nominal value of gold. In 2011, the real value is not significantly high, and it is same as or even lower than the nominal value. This is because of the deflation which implies the relative appreciation of money to the value of goods&services.

When the marginal increase of the gold value becomes closer to zero, the investors stop switching converting their saving from the money to golds. This prediction is less likely in the hyper-inflationary situation. This situation occurs due to the "deflation" which takes place when people save rather consume goods&services and/or invest to capital. The demand of money is still high (i.e. the liquidity of money is low) so that the effect of the substitution between the money and gold is low.

The cause of fall in demand of national currencies is the prediction that the value of these national currencies may be depreciated in the near future i.e. the possibility of the hyper-inflation which is the rapid appreciation of gold's real value. However, this is now seen as a speculation. Although the credit rating of some advanced countries went down and there is a concern of collapse of European economy, the USA does not seems to be bankrupt, and the European central bank and government seem to rationally tackle with this crisis. All in all, both the USA and Europe do not seem to be destroyed. The rich investors still save both US-dollar and Euro so that the governments and the central banks will still keep their financial resource well.

There is always a peak in any price rise as long as the financial market is liberalised. There is a limit of investers who are able to convert their wealth into gold. Nobody cannot save their income only by consuming gold. Therefore, when the volume of gold consumed reaches at the limit, the over-speculation of purchasing gold will end.

Rather than the gold bubble and the depreciation of credit rating, fall in the real market in this globe is a bigger problem. Too many investors save their income rather than spend. The gold bubble will end, and the money in the advanced economies will not be significantly depreciated. However, all the income is stuck as saving. They save their income by converting it to the money kept in bank or gold. In order to overcome this global recession, the liquidity of money into the real economy has to increase.

The gold bubble is less likely, but the perpetuation of this world recession is more likely...

No comments: