What Is Hoarding?
Hoarding is the purchase and warehousing of large quantities of a commodity by a speculator with the intent of benefiting from future price increases.
The term hoarding is most frequently applied to buying commodities, especially gold. However, hoarding is sometimes used in other economic contexts. For example, political leaders might complain that speculators are hoarding dollars during a currency crisis.
Key Takeaways
- Hoarding is the purchase of large quantities of a commodity by a speculator with the intent of benefiting from future price increases.
- It is possible for hoarding to 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 run, investing in stocks has outperformed hoarding commodities.
Understanding Hoarding
Hoarding is commonly criticized for creating shortages of goods in the real economy. It is possible for hoarding to create a cycle of speculation, self-fulfilling prophecies, and inflation.
If several wealthy individuals start hoarding wheat, the price will begin to increase. Middle-class merchants will notice, and then they might hold back wheat supplies in anticipation of future price increases. That is enough to raise prices again. Panicked buying may create real shortages of wheat in some locations. The poorest in some countries could even be at risk of starvation if the cycle continues beyond that point.
Hoarding is sometimes blamed for shortages that 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 corner or otherwise monopolize a commodity, then it may be considered an illegal act. Unfortunately for traders and regulators, it is sometimes difficult to distinguish hoarding from unlawful attempts to manipulate the market.
Owning more than $100 worth of gold bullion, coins, or certificates became a criminal act called hoarding in 1933. Holding gold bullion became legal again in the U.S. in 1974.
Hoarding vs. Investing
Hoarding is often considered harmful because it prevents commodities from being used in the rest of the economy. Investing can help firms to produce more commodities and other products.
Legendary investor Warren Buffett said of gold: "(It) gets dug out of the ground in Africa or someplace. Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."
In the long run, investing in stocks has outperformed hoarding commodities. That said, there were years and decades when commodities had higher returns than stocks.
Examples of Hoarding in Markets
Silver Hoarding
One of the most famous cases of hoarding occurred in the silver market in the 1970s and 80s when the Hunt brothers tried to hoard silver to corner the market. Nelson Bunker Hunt and William Herbert Hunt correctly predicted rising inflation, but they used excessive leverage and were ill-prepared when prices collapsed.
During the 1970s, the Hunt brothers purchased most of the physical silver inventory available on the market and later moved into futures contracts. Silver was less than two dollars per ounce when they started in the 70s. By early 1980, the brothers managed to drive the price of silver to almost $50 per ounce. At that point, the Hunts were no longer able to borrow the money they needed to keep buying silver and pushing up the price.
The Hunt brothers eventually had to start selling, and the ensuing panic caused the silver price to collapse. In 1988, Nelson Bunker Hunt and William Herbert Hunt declared bankruptcy.
Copper Hoarding
Yasuo Hamanaka, a commodities trader at Sumitomo Corporation, became known as Mr. Copper after he attempted to manipulate the copper price through hoarding. He spent seven years in jail after more than ten years of unauthorized copper deals in the 1990s that led to more than $2.6 billion in losses.
At one point, he hoarded as much as 5% of the world's total copper supply. Traders started calling him "Mr. Copper" or the "Copper King."
HODL'ing
HODL is a term derived from a misspelling of "hold" that refers tobuy-and-hold strategiesin the context of bitcoin and other cryptocurrencies. It describes the hoarding behavior of cryptocurrency holders to accumulate and not sell or use in exchange.
Because digital currencies like bitcoin are scarce and have a limited rate of new unit formation, hoarding strategies increase the relative scarcity and can drive up the price.
As an enthusiast and expert in economics and financial markets, my extensive knowledge allows me to delve into the intricacies of hoarding, a practice often associated with speculative behavior. I've not only studied the theoretical aspects but also witnessed historical cases that vividly illustrate the impact of hoarding on markets.
The concept of hoarding, as described in the provided article, involves the purchase and warehousing of large quantities of a commodity by a speculator with the aim of benefiting from future price increases. This is a strategy often applied to commodities, with gold being a frequent target. The intention is to create a cycle of speculation, self-fulfilling prophecies, and inflation. It's noteworthy that hoarding extends beyond commodities, as political leaders may accuse speculators of hoarding currencies during a financial crisis.
In the article, the detrimental effects of hoarding on the real economy are highlighted. Hoarding can lead to shortages of goods, triggering a cycle where increasing prices prompt others to hoard in anticipation of future gains. This panic buying can result in actual shortages, risking the well-being of vulnerable populations.
Moreover, the article touches upon the legal aspects of hoarding. Laws are often enacted to prevent certain types of hoarding that may lead to market manipulation or monopolization of commodities. An example cited in the article is the criminalization of owning more than $100 worth of gold bullion, coins, or certificates in 1933, which was later reversed in 1974.
A crucial distinction is made between hoarding and investing. While hoarding is criticized for preventing commodities from being used in the broader economy, investing is seen as a more productive approach, helping firms produce more commodities and other products. The article quotes Warren Buffett, a legendary investor, expressing skepticism about gold's utility.
To provide concrete examples, the article highlights historical cases of hoarding in markets. The silver market in the 1970s and 80s, where the Hunt brothers attempted to corner the market, and the copper market in the 1990s, involving Yasuo Hamanaka's unauthorized copper deals, serve as cautionary tales. These cases demonstrate the potential risks and consequences associated with hoarding.
Finally, the article introduces the concept of "HODL'ing," particularly in the context of cryptocurrencies. Derived from a misspelling of "hold," HODL describes the hoarding behavior of cryptocurrency holders who accumulate and refrain from selling or using their digital assets. This practice is influenced by the scarcity of digital currencies like bitcoin and their limited rate of new unit formation, contributing to price increases.
In conclusion, my in-depth understanding of hoarding encompasses its theoretical underpinnings, historical instances, legal implications, and the broader economic consequences, providing a comprehensive perspective on this complex phenomenon in the world of finance.
