"Alright," said the computer and settled into silence again. The two men fidgeted. The tension was unbearable.
"You're really not going to like it," observed Deep Thought.
"Alright," said Deep Thought. "The Answer to the Great Question..."
"Of Life, the Universe and Everything..." said Deep Thought.
"Is..." said Deep Thought, and paused.
"Forty-two," said Deep Thought, with infinite majesty and calm.
-- "The Hitchhiker's Guide to the Galaxy," Douglas Adams.
(With apologies to Mr. Adams, may he rest in peace, I never get tired of quoting that book.)
There's no rational basis for valuing gold in terms of anything else. Unlike all other widely traded metals, gold has relatively little inherent value and its above-ground quantity never decreases because ... well, gold is forever (while diamonds can burn up). These factors, plus its relative rarity, make gold a very good medium for trade, i.e., money. The ideal medium for trade is something that has no inherent value, can never be created, and can never be destroyed.
Since human stupidity is hard to measure or divide into smaller chunks, gold will have to do.
It's worth noting that digitized fiat currencies of today meet two of the three requirements 100%. If we find a way to make it hard to create, it would be a better choice than gold. Independent central banks were created specifically to make it harder to create fiat currency. But the nature of human society dictates that every system will be corrupted, and every good idea turned bad, over time. As such, the central-bank experiment, while brilliant and noble, has come to an abrupt end in failure since the '08 crisis.
The global fiat currency system was an ingenious and bold experiment except for its reliance on an optimistic view of humans' ability to overcome greed and fear. Soft inhibition/prohibition against the creation of money, be it moral, legal, or political, is not enough to prevent us from caving in to greed and fear when the time is right (or wrong). We need something stronger to save us from ourselves. Back to gold.
It is no accident that the dollar started its slide and gold its rise both around early 2002. The terrorist attacks of 9/11 alerted the world to the unthinkable, the possibility that all the powers of the U.S. could not provide protection against the new type of threats. The ensuing domestic and international policies of the Bush administration tirelessly proved this right.
Perhaps more importantly, the Bush administration showed the world that, lacking the ability to generate organic growth and wealth, the U.S. is perfectly willing to abuse the trust the world had bestowed upon it by making the dollar the global reserve currency, in order to fund a war without fronts, borders, goals, endings, or clearly definable enemies. Obama strangled any budding audacity of hope by resolutely wasting the best historical opportunity for financial/economic/regulatory/legal reform in generations, allowing himself to be bullied around and weakened in the process.
Somewhere along the process, however, gold has become more than the dollar hedge. It gradually dawned upon the world that we're faced with a paradox:
A. The dollar cannot serve as the global reserve currency, and
B. There's no alternative to the dollar as the global reserve currency.
How to get out of this Catch-22? Nobody knows, although creative/crazy ideas abound. Gold is most definitely not the answer, at least not in the old style of gold-backed currencies. But when everything else proves even uglier, the original ugly begins to look better and better. I still don't believe we'll go back to the old gold standard, but it's the least improbable among the improbables. And, with the "Infinite Improbability Drive" technology (apologies again to Adams) owned by the Fed, it's becoming less and less improbable.
Since 2002, gold has used every pathetic excuse to go up. When the dollar is weak, it's a dollar hedge; when the dollar is strong, it's the euro hedge; when crisis hits, it's the safe harbor; when the economy is good, it's the inflation hedge. Now central banks are no longer ashamed of hoarding gold. Various countries and localities are talking about using gold to settle trades, from India to the Commonwealth of Virginia.
A notable exception was 2008. But it was not because people liked cash more than gold, it was because people needed cash to unwind their positions just to get through the day. And in various scenarios, some fiat currencies may be considered temporary safe heaven. But the candidate pool is shrinking and the safety duration is shortening.
I profess zero love for gold; it doesn't hug me back. But as far as sustaining the things that do, gold is a necessary evil, the most benign evil at this point in time. I always liked Virginia; if it actually passes the alternate-currency law, I would be very tempted to move there, if only for the cool factor and the clean conscience knowing my children's future wouldn't be volunteered to keep some irresponsible bums on their spending high. My children hug me back, and I'd like to keep it that way.
When you're on the right side of a macro trend, supposedly random events inexplicably go right with improbably high probability. I can live with such blatant disregard of nice mathematical properties. What I cannot live with is the lack of understanding in regards to when the trade may end. There're many ways the gold trade may end, but valuation is not one of them (though valuation may cause temporary pull-backs once in awhile). As I said in the beginning, there's simply no rational basis for gold valuation in anything else. It is, quite simply, whatever value the market is willing to pay for.
So until the world figures out what the next common medium for trade is, gold is the temporary universal answer to Life, the Universe, and Everything. It is the question that you need to figure out for yourself.
Disclosure: I am long GLD.