The Bubble of Irrationality
What if I told you today that I’ll trade you one bulb of Tulip for your house? Sounds ridiculous right? Well, if you were in the Netherlands in 1636, you might have killed for that deal. This was the time which we have now come to know as Tulip Mania.
So what exactly was Tulip Mania? Well, there was a time (1634-1637) when the prices of tulips rose to insane amounts and eventually, like every other bubble, came crashing down and in a heart-beat and was worthless. The perceived value of these tulips was so high because they were originally brought in from Turkey and so they were low in number to begin with and soon after the tulips contracted a virus known as mosaic which gave them a flame like color. This was the kicker that lead way to a frenzy of speculation which lead to people selling their houses, land and life savings for a bulb of tulip. There is a story that says that a sailor was locked up because he had mistaken a tulip bulb for an onion and bit into it. That bulb was supposed to pay for the facilities of the ship’s entire crew for a year. Now I don’t know if there is any truth to that story (I hope not) but is it any more unbelievable than selling your house for a bulb?
I originally wanted this post to cover a brief history on Tulip Mania but I want to talk about human irrationality, especially when we’re in a bubble. I’m amazed by how clueless people were (and still are) and how easily we convince ourselves that something is so valuable even though it has NO practical use what so ever.
But we’re not that stupid now right? We don’t still put so much value in seemingly arbitrary stuff now, right? Right? Well…. Then I thought about gold. Isn't that something that in actuality has no practical use (at least not in everyday life) but we assign an insane amount of value to? Yes, it looks nice and is considerable difficult to mine but does that justify making it a vital part of the world’s monetary reserves? Same goes for diamonds which is worse.
So what am I saying? I believe we are in a gold bubble and we will realize it someday. I’m not saying that it will bring down the world’s economy once prices fall and bla bla apocalypse but sometime in the future, maybe 100’s or 1000’s of years later some kid in college doing an internship for a financial site will write a blog saying wtf were they thinking? The price far outweighs its use.
Or maybe I’ll completely off, let me know what you guys think.
Gold's bubble already popped. Prices are fundamentally supported within 10-15% or so of the $1050-1100 range because that is roughly the industry all-in cost of production per ounce, thus prices near, at or below that level will cause supply to shrink (can't produce gold at a loss). Overshoots aren't out of the picture but inflation will support the price of gold as production costs rise with it.
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