Some economists argue that the fundamental value of gold is determined by its value in jewelry. In 2009, for the first time, investment demand for gold exceeded demand for gold to be used in jewelry. An article quoted Willem Buiter, the chief economist for Citigroup, as saying that it is a mistake to invest in “something without intrinsic value, something whose positive value is based on nothing more than a set of self-confirming beliefs.” He described the increase in gold price in 2010 as a bubble.
a. Does gold have intrinsic value? Why might Buiter have said that it didn’t?
b. In what sense does a bubble in the price of an asset result from a “set of self-confirming beliefs”?
c. How might it be possible to tell whether an increase in the price of gold represents a bubble?
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