Hoarding refers to the purchase and warehousing of large quantities of a commodity by a speculator with the intent of benefiting from future price increases. While the term commonly applies to commodities like gold, it is sometimes used in various economic contexts, such as during currency crises when speculators hoard dollars.
Key Takeaways
- Strategic Accumulation: Hoarding involves buying large quantities of a commodity hoping for value appreciation in the future.
- Economic Ripple Effect: Hoarding can lead to a cycle of speculation, inflation, and economic instability.
- Regulatory Measures: Certain types of hoarding are illegal to prevent market manipulation and economic crises.
- Investment Efficacy: Historically, investing in stocks tends to outperform hoarding commodities over the long term.
Understanding Hoarding
Hoarding is often criticized for causing shortages in the real economy. Speculation about rising prices can lead to actual price hikes, creating a self-fulfilling prophecy that may result in genuine commodity shortages and inflation.
For instance, if wealthy individuals begin hoarding wheat, prices will rise, prompting middle-class merchants to hold back supplies, which further escalates prices. This scenario may lead to panic buying and potential starvation in extreme cases.
Hoarding might also be blamed for shortages caused by price controls, fixed exchange rates, and other government policies.
Illegal Hoarding
Laws are sometimes enacted to curb certain kinds of hoarding to avoid economic instability. Speculators intending to monopolize a commodity might face legal repercussions. Distinguishing legitimate hoarding from illegal market manipulation can be challenging.
For example, owning more than $100 worth of gold was once illegal in the U.S. but became lawful again in 1974.
Hoarding vs. Investing
Hoarding is often criticized as it restricts commodities from use within the economy. In contrast, investing channels funds into firms, enabling increased production of commodities and other goods.
Legendary investor Warren Buffett criticized gold hoarding, noting the precious metal’s lack of utility. Historically, the long-term growth of stocks generally surpasses returns from hoarding commodities, although certain periods saw commodities outperforming stocks.
Examples of Hoarding in Markets
Silver Hoarding
In the 1970s and 80s, the Hunt brothers famously hoarded silver, attempting to corner the market. They bought most of the available physical silver and later moved into futures contracts, driving silver prices up from less than $2 to nearly $50 per ounce. However, excessive leverage and borrowing led to their downfall, culminating in a price collapse and eventual bankruptcy in 1988.
Copper Hoarding
Yasuo Hamanaka, a commodities trader at Sumitomo Corporation, attempted to manipulate copper prices through hoarding. Known as “Mr. Copper,” he managed to control up to 5% of the world’s copper supply. His unauthorized trades eventually resulted in $2.6 billion in losses and a seven-year prison sentence.
HODL’ing
HODL is a term originating from a misspelling of “hold,” describing the buy-and-hold strategy in the context of bitcoin and other cryptocurrencies. This form of hoarding involves accumulating and not selling digital currencies, which, due to their scarcity and limited new formation rate, can lead to price increases.
Related Terms: speculation, investment, inflation, commodity, price manipulation.
References
- The American Presidency Project. “Executive Order 6102—Requiring Gold Coin, Gold Bullion and Gold Certificates to Be Delivered to the Government”.
- Congress.gov. “Public Law 93-373”.
- U.S. District Court of Wisconsin. “MDL Docket No. 1303”, Page 15.
- U.S. District Court of Wisconsin. “MDL Docket No. 1303”, Page 5.
