What Is Hoarding?
Let me explain hoarding to you directly: it's when a speculator buys and stores massive amounts of a commodity, aiming to cash in on future price hikes. You'll hear this term most often with commodities, especially gold, but it pops up in other economic scenarios too. For instance, during a currency crisis, political leaders might accuse speculators of hoarding dollars.
Key Takeaways
Here's what you need to grasp: hoarding means purchasing large quantities of a commodity as a speculator to benefit from rising prices in the future. It can spark a cycle involving speculation, self-fulfilling prophecies, and inflation. Governments often enact laws against specific types of hoarding to avert tragedies and stabilize the economy. Over the long haul, investing in stocks has proven better than hoarding commodities.
Understanding Hoarding
People often criticize hoarding because it creates shortages in the real economy. It can set off a chain reaction of speculation, self-fulfilling prophecies, and inflation. Imagine if a few wealthy folks start hoarding wheat—the price starts climbing. Then middle-class merchants catch on and hold back their supplies, expecting even higher prices, which pushes costs up further. This could lead to panicked buying and actual wheat shortages in some areas. In the worst cases, the poorest people in certain countries might face starvation if this cycle spirals out of control.
Sometimes, though, hoarding gets blamed for shortages that are really due to things like price controls, fixed exchange rates, or other government policies.
Illegal Hoarding
Laws frequently target certain hoarding practices to prevent disasters and maintain economic stability. If a speculator tries to corner or monopolize a commodity, that could be illegal. The tricky part for traders and regulators is distinguishing plain hoarding from unlawful market manipulation.
Back in 1933, owning more than $100 in gold bullion, coins, or certificates was criminalized as hoarding in the U.S. It became legal again in 1974.
Hoarding vs. Investing
Hoarding is seen as harmful because it keeps commodities out of use in the broader economy. In contrast, investing helps companies produce more goods and products. Take Warren Buffett's view on gold: it gets dug up, melted down, buried again, and guarded, with no real utility—anyone from Mars would find it baffling.
Long-term, stocks have outperformed commodity hoarding, though there have been periods when commodities did better than stocks.
Examples of Hoarding in Markets
One infamous case is the silver hoarding by the Hunt brothers in the 1970s and 80s, where they tried to corner the market. Nelson Bunker Hunt and William Herbert Hunt predicted inflation correctly but overleveraged themselves and weren't ready for the price crash. They bought up most physical silver and moved into futures, driving the price from under $2 per ounce to nearly $50 by early 1980. When they couldn't borrow more to keep buying, they had to sell, causing a panic and price collapse. By 1988, both declared bankruptcy.
Copper Hoarding
Then there's Yasuo Hamanaka, a Sumitomo Corporation trader nicknamed Mr. Copper for his attempt to manipulate copper prices through hoarding. He ended up in jail for seven years after over a decade of unauthorized deals in the 1990s that racked up $2.6 billion in losses. At his peak, he controlled up to 5% of the world's copper supply, earning titles like 'Copper King'.
HODL'ing
HODL comes from a misspelling of 'hold' and describes buy-and-hold strategies for bitcoin and other cryptocurrencies. It's essentially hoarding digital currencies to accumulate without selling or using them. Since cryptocurrencies like bitcoin are scarce with limited new supply, this hoarding boosts relative scarcity and can push prices higher.
