David Fine

Is the Gold Rally Really Over?

David: Enjoyed reading your insights. I guess the challenge that the Fed is facing is a near paralysis in the credit market. They must hope that, as credit activity does pick up, they can slowly reverse themselves so as to avoid fuelling another asset bubble with all that excess liquidity sloshing around. We'll have to see if their policy actions have inflationary consequences in the meantime.

When it comes to paper currency, I am reminded of the old rule of thumb that currency functions as: i) a store of value; ii) a medium of exchange; and iii) a unit of account. As far as gold is concerned, its only possible advantage is that, from time to time, it can be a good store of value (while failing on both other counts - i.e., as a medium of exchange or a unit of account). Even then, when you think about it, it seems rather odd that people should attribute any particular value to gold at all. I guess it comes down to the fact that pure gold doesn't. oxidize and that it is (relatively) scarce.

My own belief is that the USD will continue to depreciate in value over the next little while, leading foreign investors to bid up the price of gold (in USD terms, at least). How high might it go? I have no idea.