There is no doubt that QE1 and QE2 are what caused gold's price (NYSEARCA:GLD) to rally to the levels it has reached recently. The thesis was that the massive oversupply of dollars will cause the value of the dollar to decline (inflation), and therefore the dollar price of the hard asset/alternative currency that is gold must go up. Investors bought into this thesis and drove gold prices to all time highs.
Now we have QE infinity, and on top of that, central banks from most of the developed world are aggressively easing as well. By the same thesis you would think gold should be going parabolic by now. But instead, it's been either flat or going down. What is wrong with this picture?
It's quite simple, really. The truth is, the price of gold went up not because the dollar went down, but because of expectations that the dollar WILL go down. As significant inflation has not materialized, some skepticism of the original thesis is now starting to show amongst investors.
There are several reasons why inflation has not materialized. First of all, the global economy is still in a deleveraging cycle and is too weak to support inflation. More money chasing the same amount of goods should drive prices up in theory, but when the demand for goods is low, then additional money pumped into the economy will not be used to chase anything. Sure there might be short term inflation from speculative money piling into commodities for example, but longer term this can't be supported if the underlying demand for those commodities isn't there.
Another reason many people forget is that currency values are measured relative to each other. This means that if everybody else around the world is printing money at a similar rate, then from a pure money supply standpoint the dollar can't really decline in value! On top of that, what's happening right now is that other countries are actually outpacing the US in terms of money creation, while on the other hand the Fed is already giving possible signals that QE could end sooner than expected. So if anything, expectations are likely to be shifting more towards the dollar going higher rather than lower.
Sure, there are people who will argue that true measure of currency value should be relative to hard assets. This is correct, but again because of the current circumstances of deleveraging and a weak economy as had been described above, inflation is not really an imminent threat.
As the original thesis unwinds I believe that gold prices are likely to fall further in the short to medium term, or at the very least stay flat. Long term the big question for gold is how much inflation (if any) might come out of this massive money supply created by the Fed, and how effective they can be in controlling it.