ddtuttle

First Fuel, Now Metals - Forecasts Lowered

Yeah, this is a weird time. The behavior of gold totally depends on how bad the economy gets. In 'peace time' gold behaves like a commodity, basically miners supplying jewelers, with price dictated mostly by jewelry demand.

However when the economy craters with massive deflation like now, paper money holds up very well, preventing any flight to gold. However, even without extra demand, you would expect gold to hold its value . Right now all assets are falling in price, but gold is holding its value or dropping slowly depending on which currency you talking about. So gold remains the asset of choice, but only AFTER cold hard cash.

If on the other hand, we end up with inflation, where paper money starts seeking its intrinsic value (zero), gold is known by everyone as the investment of choice. Governments would print more gold if they could, but since they can't, it only needs to hold its value to go up in price. But if the inflation gets bad enough, heavy demand will outstrip all supplies and the price will really shoot up.

Central banks will try to moderate its price, but with demand shifting from promises (paper gold) to physical gold, they won't be able to (they lease their gold in the paper markets, but won't sell the actual bars). We easily return to the 1980's peak of $2100/oz (inflation corrected) then perhaps higher if this period is worse.

Of course, this is never a good thing, even if you're a gold bug. Everything else you own, like your house, will be in the crapper. Its a little like a home owners insurance policy. When your house burns down you get a big check, but your house is still gone.