Krugman: Why Advertising May Be Causing Gold's Rise

[raja]

July 19, 2011, 7:44 pmThe Glenn Beck / DeBeers Connection

Kash, at the Street Light, has a very good post on the price of gold and its relationship or lack thereof to inflation fears. He points out that the market for gold is surprisingly small, so that it would take only a relatively small number of extra buyers to push the price way up, even when other, more direct measures of expected inflation remain low. And he draws a parallel with diamonds:

It’s also conceivable that a good advertising campaign by gold producers could be enough to move the price of gold. Imagine that an effective, sustained advertising campaign, targeted at wealthy, conservative individuals in the US, is able to persuade 25,000 of them per month to switch a portion of their financial assets into gold. (Note that the target audience would be those roughly 3 million US households that have over $1 million in financial assets.) Suppose for the sake of argument that each of them is persuaded to shift just 5%, or $50,000, of their portfolio into gold. Such an advertising campaign would have the effect of pushing $15 bn per year into the market for investment gold — very possibly enough to have a significant impact on the price of gold, given how small the overall market for gold is.
Note that a very similar thing happened to the market for diamonds in the middle of the 20th century. The DeBeers diamond cartel used an incredibly successful advertising campaign in the 1950s to cement the idea of the diamond as the premier gemstone, and in so doing permanently changed the value of diamonds.

Surprisingly, though, Kash doesn’t say explicitly that this parallel is not at all hypothetical. Glenn Beck was financially intertwined with Goldline, and therefore had a financial stake in pushing fears of hyperinflation. And he had many, many viewers. So there was a direct channel through which conservative Americans were being pushed into buying gold.
Market prices almost always tell you something useful. But sometimes what they tell you is that there’s a marketing scam in progress.

[c1ue]

Re: Krugman: Why Advertising May Be Causing Gold's Rise

Goodness Krugman sinks lower and lower.

No mention whatsoever of the dollar's ongoing devaluation, or the deficit spending's complicity in said devaluation (the level of which he himself says is too low).

The rise in the price of gold is due to Glenn Beck, that evil Republican/Tea Party spokesmodel...

[jk]

Re: Krugman: Why Advertising May Be Causing Gold's Rise

my impression is that economists hate gold. gold is so irrational, they can't model it. personally, i think gold is a moronic thing to own as it's pretty much useless except for jewelry. but i have 46% of my assets in it, nonetheless. as keynes said about the financial markets as a beauty contest, you don't pick what you're attracted to, but what you think most others will become attracted to. hard to model that process.

[GRG55]

Re: Krugman: Why Advertising May Be Causing Gold's Rise

So why did the author stop before asking [and answering] the obvious question?

If:

"...The DeBeers diamond cartel used an incredibly successful advertising campaign in the 1950s to cement the idea of the diamond as the premier gemstone, and in so doing permanently changed the value of diamonds..."

And:

"...It’s also conceivable that a good advertising campaign by gold producers could be enough to move the price of gold..."

Then why haven't the gold producers undertaken such an advertising campaign? Surely the major gold producers as a group are well aware of the DeBeers example, and surely they would have been increasingly motivated, more than ever I would have expected, to undertake such an effort to try to arrest the two decade decline in gold prices after the 1980 peak.

Instead we had companies like Barrick putting on massive hedges. Could it be the gold producers understand the market for gold better than the economists, who seem to be focussed on jewellery demand and the Indian wedding season?

Years ago, at a mining conference in London, UK, I attended a presentation by an economist on gold. The economist [turned metals analyst?] spent almost 30 minutes showing elaborate PowerPoint slides, culminating with the conclusion that gold was always and everywhere an inflation hedge, and would never rise faster than long term CPI. During the presentation she made mention of the historical correlation between the value of one ounce of gold and the price of a Saville Row men's suit. During the Q&A that followed I asked her if she could recommend a Saville Row tailor that would make me a suit for $400, the then price of an ounce of gold. When she could not, I asked if she thought the rather considerable gap between the two would be closed by a rapid, faster-than-CPI, rise in the gold price, or a severe discount in men's apparel costs...

[c1ue]

Re: Krugman: Why Advertising May Be Causing Gold's Rise

"...The DeBeers diamond cartel used an incredibly successful advertising campaign in the 1950s to cement the idea of the diamond as the premier gemstone, and in so doing permanently changed the value of diamonds..."

Then why haven't the gold producers undertaken such an advertising campaign? Surely the major gold producers as a group are well aware of the DeBeers example, and surely they would have been increasingly motivated, more than ever I would have expected, to undertake such an effort to try to arrest the two decade decline in gold prices after the 1980 peak.

Yes, I didn't even cover that part of Krugman's idiocy.

(Jewelry grade) Diamonds are vastly different than gold - for one thing DeBeers holds a huge supply of jewelry grade diamonds out of the marketplace and thus in a real sense controls supply.

Gold on the other hand, outside of the CBs, is pretty much in full play. Even the CB gold in a certain sense is 'on the market' due to leasing.

Is there commodity leasing for jewelry grade diamonds?

I think not. Though of course there is a commodity market for industrial diamonds for drilling.

There are so many more ways to beat on that hack, but really what's the point.

Useful Idiot.

[LorenS]

Re: Krugman: Why Advertising May Be Causing Gold's Rise

Of course advertising has an effect on the price of gold (or lack there of BTW - compare gold "advertising" to the $$ and influence behind stocks, bonds or real estate). The $$ value of gold is purely a social phenomenon. Why would you not expect advertising to have an impact? It's even self reinforcing. The higher the price goes the more money there is available to advertise the product. The higher the price goes, the more "interesting" the asset becomes to the general public (the ones most influenced by advertising).

Find an investment or consumer good whose price isn't impacted by advertising, paid shills or media attention.

You can't possibly make a "profit" in an investment without finding someone to "buy high". If you've got something to sell it's in your best interest to advertise the fact.

I have a used kid's bike to sell. Advertising the fact works better than letting the bike sit in the garage.


"wow, this economics stuff is easy!"

[coolhand]

Re: Krugman: Why Advertising May Be Causing Gold's Rise

As EJ has said multiple times (in maybe slightly different language), gold is the ultimate extinguisher of debt, full stop. That is why central banks maintain it on their balance sheet. Gold's very usefulness is that it isn't useful for anything. When your currency is debt-backed fiat, you CANNOT let a debt deflation spiral begin. If you do, you destroy the backing of the currency (gov't debt) & therefore the gov't, so unless you think a gov't is going to commit suicide & walk away from power (unusual in thousands of years of history), deflation isn't going to happen.

But we still need to get rid of the unpayable debt. So we must deflate that debt against something. EJ has rightly noted that since 1971, that "something" has been oil, as we print money, oil prices rise, & then increased oil supplies come on line, & voila! Restart the whole cycle over with cheaper dollars.

The problem this time is peak cheap oil means this playbook (deflating debt against oil) will simply crash the world economy & starve billions to death, inciting social unrest of the worst kind, b/c their is NOT an adequate supply-side response even available from the oil market.

Since we have NOT invested in/discovered any alternative energies that provide the same or better energy output & convenience of oil, we are in a bind. We need to find something new against which to deflate the debt. The problem is if you deflate it against anything useful (food, copper, gas, land, etc.), you will incite social unrest or war as people will be priced out of their ability to buy needed commodities, & you will crash the economy worse - ie running the old playbook in peak cheap oil times is counter productive.

Sooner or later, the powers that be will get the joke - that you can deflate the debt & derivatives against gold all the way to infinity without really hurting anyone (except someone that has too much exposure to debt & not enough to gold - ie China.) For example, Italy has 1.8T Euros of debt, but 2,400 tons of gold. This means at 22,000 euros or $33,000/oz, Italy has no net debt. For Greece, the # is closer to $140,000/oz. For the US, depending on definition/backing, the # is anywhere from $12,000-50,000/oz.

If this deflating the debt against gold was going to be the ultimate end game, one would expect the ultimate insiders, the world's central banks, to be buying gold like crazy. And what do you know? They became net buyers 1st time in decades in 2009, bigger net buyers in 2010, & are on pace to beat 2010 in 2011...

You'd also expect the guy with the most to lose from this being the end game buying gold as if his life depended on it. And what do you know? China is buying gold like their life depends on it...and encouraging their people to do so...and mining their own as rapidly as possible...and buying gold mining assets in South Africa...

[jk]

Re: Krugman: Why Advertising May Be Causing Gold's Rise

During the Q&A that followed I asked her if she could recommend a Saville Row tailor that would make me a suit for $400, the then price of an ounce of gold. When she could not, I asked if she thought the rather considerable gap between the two would be closed by a rapid, faster-than-CPI, rise in the gold price, or a severe discount in men's apparel costs...

lol. did she reply?

[touchring]

Re: Krugman: Why Advertising May Be Causing Gold's Rise

Sooner or later, the powers that be will get the joke - that you can deflate the debt & derivatives against gold all the way to infinity without really hurting anyone (except someone that has too much exposure to debt & not enough to gold - ie China.) For example, Italy has 1.8T Euros of debt, but 2,400 tons of gold. This means at 22,000 euros or $33,000/oz, Italy has no net debt. For Greece, the # is closer to $140,000/oz. For the US, depending on definition/backing, the # is anywhere from $12,000-50,000/oz

Ya, but who is going to pay 22,000 euros for Italy's gold.

China is still printing hell a lot of money. That's where the money to buy gold comes from.

But i see trouble in Spratly.

[aaron]

Re: Krugman: Why Advertising May Be Causing Gold's Rise

Of course advertising has an effect on the price of gold (or lack there of BTW - compare gold "advertising" to the $$ and influence behind stocks, bonds or real estate). The $$ value of gold is purely a social
Find an investment or consumer good whose price isn't impacted by advertising, paid shills or media attention.

You can't possibly make a "profit" in an investment without finding someone to "buy high". If you've got something to sell it's in your best interest to advertise the fact.

I have a used kid's bike to sell. Advertising the fact works better than letting the bike sit in the garage.


"wow, this economics stuff is easy!"

I think Krugman was trying to say gold is going up because of advertising only. Or, at least that is what he wants is followers to believe.

He is useful if he tells people to start buying gold one day. That will be the time to sell.

[Raz]

Re: Krugman: Why Advertising May Be Causing Gold's Rise

my impression is that economists hate gold. gold is so irrational, they can't model it. personally, i think gold is a moronic thing to own as it's pretty much useless except for jewelry. but i have 46% of my assets in it, nonetheless. as keynes said about the financial markets as a beauty contest, you don't pick what you're attracted to, but what you think most others will become attracted to. hard to model that process.

I agree that it's senseless to own gold when one's currency receives a real rate of interest, and the issuing government isn't owned and operated by and for the benefit of criminals! Gold is NOT an investment - it's a currency.

I don't agree with those who say it's useless or has "no intrinsic value".
But, without demand from those fleeing their debased currencies it would probably be trading at $700 per ounce.
(The marginal cost of new production, + 10%.)

http://geology.com/minerals/gold/uses-of-gold.shtml

BY THE WAY, I just posted some excellent technical work on gold on this existing thread:

http://www.itulip.com/forums/showthr...492#post202492

Enjoy!

[lektrode]

Re: Krugman: Why Advertising May Be Causing Gold's Rise

thanks mr raz!

[c1ue]

Re: Krugman: Why Advertising May Be Causing Gold's Rise

But, without demand from those fleeing their debased currencies it would probably be trading at $700 per ounce.
(The marginal cost of new production, + 10%.)

This isn't really a true statement.

It would only be true if in fact the ongoing demand was such that there was a market for gold beyond existing stocks.

Unlike most anything else, gold doesn't get used up by almost anything so all of the supply from the past 3000+ years is pretty much still there.

Were investment demand to disappear overnight due to a miraculous outbreak of global socio-economic sanity, we could just as easily see gold head back to $200.

The premise of EJ/iTulip, however, is that so long as said socio-economic sanity does not return, the conditions for gold to increase in value will exist.

[Raz]

Re: Krugman: Why Advertising May Be Causing Gold's Rise

This isn't really a true statement.

It would only be true if in fact the ongoing demand was such that there was a market for gold beyond existing stocks.

Unlike most anything else, gold doesn't get used up by almost anything so all of the supply from the past 3000+ years is pretty much still there.

Were investment demand to disappear overnight due to a miraculous outbreak of global socio-economic sanity, we could just as easily see gold head back to $200.

The premise of EJ/iTulip, however, is that so long as said socio-economic sanity does not return, the conditions for gold to increase in value will exist.

Excellent point, and in retrospect I must concede that you're probably correct.

I wrote this in a hurry because I wanted to "advertise" the CHARTWORKS piece I had just posted under Commodities. And speaking of commodities, if governments ceased to systematically rape the holders of their fiat by allowing market forces to determine interest rates, gold prices would likely fall, and if demand is less than supply - and remains so for an "extended period" as the Bernanke would say - then the marginal cost of production would not act as a floor.

While I really doubt it, gold could fall to $200 per ounce. Now that would likely be an excellent climate in which to own equities.

[Mn_Mark]

Re: Krugman: Why Advertising May Be Causing Gold's Rise

Were investment demand to disappear overnight due to a miraculous outbreak of global socio-economic sanity, we could just as easily see gold head back to $200.

If global socio-economic sanity were to break out - meaning balancing government budgets through spending cuts and tax increases, letting businesses that make poor investment decisions fail, and getting rid of the rest of the moral hazard that is skewing the economy - then it seems to me that gold could just as easily skyrocket as people seek safety from the ensuing colossal depression, bank runs, etc. I don't know that I'd want to be in dollars when this whole shithouse goes up in flames, even if the flames are the result of sudden responsible government behavior. I don't know that a fiat dollar would even survive in an environment of global socio-economic sanity.