Wednesday, November 23, 2011


Peter A. Abken

"Recent gyrations in the price of gold may lead one to wonder whether economic theory has any power to explain gold price movements. Some observers believe that “the ongoing frenzy in the gold market may be only an illusion of crowds, a modern repetition of the tulip-bulb craze or the South Sea Bubble.” Has gold fever infected otherwise rational individuals, or is there an economic rationale behind this behavior?..."


"...To begin, it is useful to distinguish between gold stocks and flows. The stock of gold is the quantity held at a given time, whereas the net flow of gold is the change in that stock during a particular interval of time. Production flows add to stocks as newly mined and refined gold becomes available to the  market; consumption flows deplete stocks as gold isput to uses that render it irrecoverable. Gold’s use in electronics, for example, depletes stocks of gold, since recycling gold is frequently uneconomical in these applications. The metal’s use in art also depletes stocks because once incorporated in a work of art, gold is no longer available to the market. Presumably, if such a work of art is deemed “priceless,” no price of gold would cause the work to be scrapped and the gold to be melted down, regardless of how high the price might be. In view of these distinctions, gold stocks should be understood to mean readily marketable stocks at a particular time..."


"...Times of economic turmoil and political upheaval tend to produce a demand for gold to safeguard wealth. Gold is a concentrated, anonymous asset. Wealth held in the form of gold is less susceptible to confiscation by governments than wealth held in other forms. Small quantities of gold generally exchange for large physical quantities of other real assets. Gold is therefore highly mobile compared to most other forms of wealth, ideal for taking flight across national boundaries. Also, wealth may be converted from gold into other assets without divulging the precious metal’s history of ownership..."

"...Particularly during 1979, the political and economic unrest that has beset much of the Middle East and neighboring Asia has engendered a considerable demand for gold as a store of value. Newspaper accounts of activity in the gold market routinely reported the market’s speculation that the Middle Eastern demand for gold was the driving force behind the upsurge in the price of gold in late 1979 and early 1980. But before the international turmoil of 1979, other factors were probably..."


"...An analysis of the probable effects of official auctions on the gold price based on the model of gold price movements is given in general terms in the following example. After an announcement by the U. S. Treasury of a gold auction, including the quantity to be auctioned and the time of the auction, the actual auction would have little effect on the gold price when it occurs if the market anticipates the auction. The market price would fall in reaction to the initial announcement, entirely discounting the effects of the auction before it takes place. Obviously, the gold market does not predict the effects of such an auction perfectly; the market price changes as forecasts are revised. For example, if the demand at a given price has been underestimated at the time of the auction, the price will rise to clear the market..."

[Mrt: An older but a nice doc.]


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