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Comment by laurencerowe | Hacker News Reader

That's a win for society if the money is instead invested into something productive!

But it's a loss if it's forced into risky investments that aren't productive.

People choose to hold non-yield-bearing assets when they believe the returns offered by current investment opportunities are not sufficient to justify the risks.

It is the miracle of modern capital markets that enables almost anyone to quickly and easily invest their savings in productive assets, but of course capital markets aren’t perfect. The availability of “none of the above” options (like gold) that remove savings from the pool of active investment capital is the essential feedback loop that balances risk and return.

Modern capital markets also have non-yield-bearing assets like gold ETFs. The only practical difference is a tiny expense ratio and more liquidity.

I never invested in gold because it is not productive. I don't have any money, either (other than pocket money), because I've invested all of it.

Gold is usually invested in as a hedge against inflation. It's not really the gold that goes up and down in value, it's the dollar that goes down and up.

Given that the gold and the dollar are not productive I think one is betting that society is less productive than inflation when one invests in gold and that one will need to pay a ransom over a long weekend when one holds dollars.

This is an oversimplification IMO. There are higher order effects on the price of gold that makes it not directly related to the value of the dollar.

I'm pointing this out because I have seen a lot of sentiment recently about how the dollar is crashing, just look at the price of gold. Yes, the dollar is decreasing in value faster than usual, but it also isn't crashing in the way that gold is spiking.

This sentiment I think drives speculative gold demand, from standard speculative investing FOMO as well as from emotionally driven inflation fear well beyond what is realistic. The same thing happens to the stock market.

Wouldn’t gold be spiking in proportion to the market’s predicted future value of the dollar, rather than its current value? If the market’s paying attention you’d expect its gold valuation to lead the actual inflation numbers.

It does but that is the first order effect only. You also have people buying gold because number going up means number goes up more. This has a positive feedback loop since the people buying for that reason also makes number go up, which sucks in more people. You also have people bandwagoning hyperinflation type scenarios without a plausible thesis, which results in I think much more hedging in this area than usual. I hadn’t seen hyperinflation as a topic break into the mainstream before. You also have opportunistic savvy speculation that is based on a perception of the perception of the people doing the other ones. And probably more scenarios since there are a lot of interactions possible at higher orders.

So like some of the increase in gold price is due to the decrease in dollar value, certainly, but it isn’t all of it, and at the present time I don’t believe it is near to most of it.

I’m legitimately curious how this of all things was downvoted. Isn’t this like boring mainstream non-controversial economics?

(I know about the commenting about downvotes rule but I don’t feel this fits the pattern of what that rule wants to prevent)

You can call it emotionally driven, but if it’s taken as a fact that the dollar is and will continue to lose value ( and the president is incentivized to pump the price of Bitcoin, whatever level of hell/episode of Mr Robot that is) - then you should expect gold to go up infinitely, relative to a worthless dollar. People aren’t necessarily trading out of fear, just trying to predict the future.

But the perception of future worthlessness of the dollar cannot actually make the dollar worthless. It doesn't work like that.

In a theoretical scenario where there are many competing substitutable currencies it should work like that, but we are not in that theoretical scenario, are we?

How would you explain the price of gold between 1980 and 2000, then? It's price collapsed, was there no inflation back then?

Gold was worth about as much in nominal(!) terms ~2006 as it was in back in 1980 then doubled in a couple of years. Doesn't seem like a very good hedge but rather a very volatile speculatory asset...

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