Wednesday, February 20, 2013

GOLD V/S CASH...



Budget-2013 Macroeconomic Challenges Ahead of Budget

...There was a compositional effect as household savings in gold and real estate increased dramatically, essentially to hedge against inflation. Prices of both these assets are subject to bubble type effects. If any of the bubbles burst, there could be negative wealth effects...


Comment;

If the gold and real estate bubble bursts prices will come down with gold and real estate prices but that would increase the value of cash. People who have cash as savings will find the price-level cheap after the bubble bursts. The value of cash will increase.


To elaborate I would like to take, those who disagree, to a situation. “Other things remaining constant, level of employment and income constant. A bubble, say in gold, bursts with a government decision that it will never put its money in gold in any form, directly or indirectly. Or simply the government will never buy or sell gold in any form. And I think this situation will have a devastating effect on gold prices. Nominal prices are very much higher than real prices. And in the long run nominal prices tend or converge to the real prices which is always lower than nominal prices, it’s an expectation not a prophecy, may be just mine. And everybody will try to sell gold at the same time. Prices will start moving down unless everybody who wants that gold gets it, and market will undergo a correction, a downward spiral. And at lot of wealth will go down the drain. But people who have a job and lot of cash will gain from this situation because prices will come down because, again, due to low economic activity. Luckily not that low as in a housing collapse because that is a labor intensive industry and generate a lot of employment. People will go through a loss because of gold and will save more this time. Consumption will lag behind. Prices will come down definitely. And, if in this situation prices come down that will mean that we can, now, buy more than before. And, if we have a lot of cash then we can buy a lot more.”

No comments:

Post a Comment

"Everybody is worried about rate cuts and nobody for lower interest rates on savings, when all save and few borrow..."

Growth is sacrificed when the value of the money is sacrificed because spending goes down due to inflation, and people buy less due to high ...