The Link Between 0% Interest Rates, Spiking Gold
When “risk-free” cash keeps paying a guaranteed loss, then a growing number of people will, in due course, start seeking shelter elsewhere.
–“What The Economist Doesn’t Know About Gold”; Seeking Alpha (6/29/2010)
The above quote is from the best piece I’ve seen yet explaining why gold is setting record highs.
The executive summary?
When cash can be deployed profitably — think, bonds, CD’s, stocks, anything — the opportunity cost of holding gold is high.
However, when holding cash yields .0001% — thanks, Federal Reserve — the opportunity cost of holding gold disappears.
In fact, after taking account of inflation, the cost of holding cash is actually negative (and has been, for much of the last decade).
Make it painful to hold cash . . . and people won’t.
Gold has emerged as the alternative for an increasing number of savers (not to mention various Central Banks).
P.S.: the best definition of opportunity cost I know is an anecdote about Cornelius Vanderbilt and real estate investing.
In the early 19th century, Vanderbilt bought a plot of land on Wall Street for $4,000, then re-sold it two years later for $8,000. His perplexed Buyer asked him (after the closing) why he sold a piece of land sure to continue appreciating.
Vanderbilt replied that, in another two years, the Wall Street land was likely to be worth $16,000.
Meanwhile, the 100 lots that he had just purchased in Greenwich Village (north of Wall Street, and then raw land) with his Wall Street proceeds for $80 apiece were then likely to be worth $80,000.
And he was right!
