Hoarding

Hoarding

What is hoarding?

Hoarding is the purchase of large quantities of a commodity by a speculator in order to benefit from future price increases. The term hoarding is most often used to buy raw materials, especially gold.

However, hoarding is sometimes used in other economic contexts. For example, political leaders may complain that speculators raise dollars during a currency crisis.

Hoarding is sometimes accused of shortages which are actually caused by price controls, fixed exchange rates and other government policies.

Hoarding Critics

Hoarding is often criticized for creating shortages of goods in the real economy. Hoarding may create a cycle of speculation, self-fulfilling prophecies and inflation.

If several wealthy individuals start to collect wheat, the price will start to rise. Middle class traders will realize this, and may cut the supply of wheat in anticipation of future price increases. It is enough to raise prices again. Panicked purchases can create real shortages of wheat in some places. The poorest people in some countries may even be at risk of starvation if the cycle continues beyond this point.

Hoarding is sometimes accused of shortages which are actually caused by price controls, fixed exchange rates and other government policies.

Illegal hoarding

Laws are often passed against certain types of hoarding to prevent tragedies and reduce economic instability. If a speculator intends to block or monopolize a commodity, this can be considered an illegal act. Unfortunately for traders and regulators, it is sometimes difficult to distinguish hoarding from illegal attempts to manipulate the market.

Owning more than $ 100 of gold bars, coins or certificates became a criminal offense called hoarding in 1933. Holding gold bars became legal again in the United States in 1974.

Key points to remember

  • Hoarding is the purchase of large quantities of a commodity by a speculator in order to benefit from future price increases.
  • Hoarding may create a cycle of speculation, self-fulfilling prophecies and inflation.
  • Laws are often passed against certain types of hoarding to prevent tragedies and reduce economic instability.
  • In the long term, investment in equities has outperformed commodities.

Hoarding vs investment

Hoarding is often seen as harmful because it prevents commodities from being used in the rest of the economy. Investing can help companies produce more and more products.

Legendary investor Warren Buffett said of the gold: “(It) is mined from the ground in Africa or elsewhere. Then we melt it, dig another hole, bury it again and pay people for let him keep it. It has no use. Anyone watching from Mars would scratch his head. “

In the long term, investment in equities has outperformed commodities. On the other hand, there have been years and decades when commodities had higher returns than stocks.

Famous examples of hoarding

Money hoarding

One of the most famous cases of hoarding occurred in the silver market in the 1970s and 80s when the Hunt brothers attempted to hoard money to grab the market. Nelson Bunker Hunt and William Herbert Hunt correctly predicted higher inflation, but they used excessive leverage and were ill-prepared when prices collapsed.

During the 1970s, the Hunt brothers bought most of the physical silver stocks available on the market and then opted for futures. Silver cost less than two dollars an ounce when it started in the 1970s. In the early 1980s, the brothers managed to drive the price of silver up to almost $ 50 an ounce. At that time, the Hunts were no longer able to borrow the money they needed to continue buying money and driving up the price.

The Hunt brothers finally had to start selling, and the ensuing panic caused the price of silver to plummet. In 1986 Nelson Bunker Hunt and William Herbert Hunt declared bankruptcy.

Copper hoarding

Yasuo Hamanaka, a commodity trader at Sumitomo Corporation, became known as Mr. Copper after trying to manipulate the price of copper by hoarding. He spent seven years in prison after more than ten years of unauthorized copper transactions in the 1990s, which resulted in more than $ 2.6 billion in losses. At one point, it accumulated up to 5% of the world’s copper supply. Traders began to call him “Mr. Copper “or” Copper King “.

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