Ben Chu: Gilded bubbles of denial

Outlook We humans have a biological need for narrative explanations, for meaning. We instinctively dislike the idea that things just happen. We want to know why they happen. It makes us feel better. Take the gold price crash.

Keynes' barbaric relic has surrendered 22.5 per cent of its value since its peak last October, with a massive slide coming this month.

A plethora of explanations have been offered. Cyprus is looking at selling some of its reserves of the yellow metal. The Chinese economy is slowing down. The Federal Reserve may stop printing money, reducing the need for people to hold gold as an inflation hedge. People are putting their cash elsewhere. Investor confidence is up. Investor confidence is down.

None of it makes much sense. Cyprus is eyeing a €400m gold sale, hardly enough to move the market. Gold is not an industrial metal, so why should China's slowdown impact the price? Why would the Fed stop its asset purchases when employment growth is slowing and the central bank has a self-imposed target of reducing joblessness? And so on.

Sometimes prices do move in response to specific articles of new macro-economic information. But not always. Sometimes people sell because other people are selling. And they carry on selling because other people carry on selling. There's no neat explanation, no meaning to be found – except that the elevated price never had any good reason in the first place. Sometimes there are irrational bubbles which go pop. Strange, after all we have been through in recent year, how loath we still are to accept that.

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