Robert Shiller ‘Gold Bulls Driven By Emotions’

Robert Shiller ‘Gold Bulls Driven By Emotions’
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Robert Shiller 'Gold Bulls Driven By Emotions'

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By Rhiannon Hoyle and Francesca Freeman

There are few assets that stir up the emotions quite like gold. Love is declared using it, nations have fought wars over it; even its categorization as a “precious” metal puts it into a different class. But what is it about the shiny, yellow metal, which ultimately has few industrial uses, that causes it to represent such great value that as soon as it’s dug up, huge swathes of it are locked securely away in vaults?

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Experts in behavioral finance put it down to a combination of factors, mostly psychological. Gold’s value is largely defined by the emotional, historical and cultural baggage that has been attached to it over thousands of years.

Yale University economics professor Robert Shiller, who is also a former vice president of the American Economic Association, says:

“The reason why people buy gold seems to be the same reason why people stick with old religions. Anything people have stuck with for thousands of years must have some merits, right?”

Investor returns on gold have certainly been rewarding in recent years. Having fallen out of the investment mainstream during the 80s and 90s following a relatively appalling performance, gold began a steady, decade-long bull run that rapidly accelerated following the global financial crisis. In the year after the October 2008 collapse of Lehman Brothers, the spot price of gold traded in Europe rocketed by 50%.

As the world’s largest economies continue to struggle with sovereign debt, high unemployment and sluggish economic growth, gold’s path higher has continued. In 2011, spot gold has soared 47% from a January low at just over $1,300/oz to an all-time high at $1,920.94/oz in early September.

But if fear and anxiety has been driving gold’s gains, why is the precious metal seen as a so-called safe-haven in the first place?

Much is down to the metal’s history.

First used by the Egyptians in around 3,600 BC, gold has been the stuff of legend, adorning kings and queens in both life and death, covering sacred buildings and filling treasure troves of the wealthy. Thousands flocked to California and South Africa in gold rushes that boosted production and still sustain communities now.

“Historically, it has stood the test of time,” and that means people generally look at it very differently to other financial assets, says David Tuckett, a professor at the University College London and a former president of the European Psychoanalytic Federation.

Gold’s religious significance meanwhile also spans millennia and, with the metal still prominent in places of worship worldwide, it rouses an entirely different reaction from most potential buyers than other assets, experts say. For the Chinese, gold is seen as an auspicious investment, while in India–the world’s largest consumer of the metal–consumers traditionally stock up on gold, from single coins to many ounces of solid bullion, before weddings and religious festivals, such as Diwali.

Indeed, during times of trouble or war, when people feared that their assets may be seized and that the currency may become worthless, gold in turn has been viewed as a sound asset–one that will always buy food or transportation.

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