The Arithmetic of Gold: Why Its Price Has No Ceiling
by: David Goldman
October 07, 2009
What’s the price of the last ticket on the last train out of Paris on the night the Germans march in? Whoever is carrying the most cash will get it, and that will be the price.
Robert Merton, the great finance theorist, showed that in a multi-time-period model, investors hedge against the prospective change in the investment opportunity set. If sufficient hedges are not available the price of such hedges can be arbitrarily high. As I have tried to show in several recent articles, most recently this Sept. 15 essay at Asia Times, gold is a hedge against the collapse of America’s central role in world affairs.
What is the correct price? Central banks alone own about 4.8 million tons of gold. The world produces about 2,200 tons. Suppose that central banks wished to increase their gold holdings by 1 percent. That’s 48,000 tons or so, or more than 20 times annual mining production.
What’s the price elasicity on that sort of thing? How badly do you need that ticket out of Paris?
I’ve been recommending gold since June, for the last $100 or so of the runup, and I continue to hold my own cocktail of gold mining stocks and gold futures.
Robert Merton, the great finance theorist, showed that in a multi-time-period model, investors hedge against the prospective change in the investment opportunity set. If sufficient hedges are not available the price of such hedges can be arbitrarily high. As I have tried to show in several recent articles, most recently this Sept. 15 essay at Asia Times, gold is a hedge against the collapse of America’s central role in world affairs.
What is the correct price? Central banks alone own about 4.8 million tons of gold. The world produces about 2,200 tons. Suppose that central banks wished to increase their gold holdings by 1 percent. That’s 48,000 tons or so, or more than 20 times annual mining production.
What’s the price elasicity on that sort of thing? How badly do you need that ticket out of Paris?
I’ve been recommending gold since June, for the last $100 or so of the runup, and I continue to hold my own cocktail of gold mining stocks and gold futures.
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