The (gold) market can stay irrational…

NPR’s Planet Money has an excellent episode discussing whether gold is in a bubble or not. The blog entry is worth reading throughout, as is their entire series on money including the episode on the criteria for choosing gold.

Listening to the show, I found this quote incredible:

“Showing people that the market was in a price bubble just fueled the price bubble even more”.

Literally, he showed them that the market price was $12, for an $8 asset. And the price went up. Apparently we are happy to pay too much for an asset, as long as we think someone else will pay more – as long as we think it is a market of fools. This has been shown by Meir Statman as well – real investors are happy to buy into a bubble, as long as they think that bubble will continue to increase.

The show ends trying to define whether or not gold is in a bubble. Tim Hartford’s response:

Gold is a tricky one, and here’s why. … bubbles should be defined in terms of fundamental values. For the price of corporate stock, we should be looking at future profits, and you need to make your best judgment for what that should be. But … it’s just not clear what the fundamental value of gold is. It’s worth something because people have always thought it’s worth something. And that’s really weird, because what it tells you is gold is in a 4,000-year-old bubble. And if it’s lasted 4,000 years, maybe it will last another 4,000 years. Who am I to say?

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