Types of demand

I have been thinking some more about bubbles and the crises that come after (which is actually partially a correction) which I wrote about earlier. About a year ago I noticed there was more demand for gold than usual. With almost all parts of the economy doing so badly (Jim Rogers advised people to buy commodities like oil, and invest in food because he foresees food shortages) a lot of people "fled" towards the gold market, driving the prices up.

I explained this to someone like this: why would people suddenly need more gold? It is investors driving up the prices, but there is no sudden "real" need for gold. If some technological product would be invented, became popular and required gold to manufacture, the price of gold might structurally go up. Otherwise it is not a proper rise of value. A lot of the people buying gold only do so with the intent to sell it later, which will lower the price.

So I was looking into types of demand and I found this page on it. It describes some things which make up demand. What seems to be missing is the difference between "real" demand and temporary investor-driven demand. The latter is not structural, the first one usually is. Usually when there is investor-driven demand there is also "real" demand, but investors hoping to make money drive up the prices artificially.

Again I would like to stress: watch out for "fashionable" investments. Invest in what you know about. Not that I am rich, but I saw Apple turning around their business around 2000. They used to be terrible for years, but with NeXT they bought a good operating system which they desperately needed. It is the basis of Mac OSX and iOS. That is something I know about and I guess I should have invested in Apple in 2000, but I didn't really care.

© Koos Swart 2013