The US Dollar, accepted as the world's "reserve currency" after all major currencies abandoned the gold standard, enjoyed widespread trust in the '80s and '90s following Volker's monetary heroics. It is actually a little surprising that gold's price held up as well as it did in the face of a doubling of mine output during that period.
During the most recent decade, as shown above, the US money supply gained momentum under Chairman Greenspan during the bursting of the dot.com stock bubble, and really exploded when Mr. Bernanke addressed the 2008 mortgage-based credit crisis with a rapid doubling of the monetary base. The behavior of gold's price shows that currency-related investment became once again the dominant demand variable.
We all know that by legislative fiat the Federal Reserve Bank is independent of the central government. The Bank's officials are appointed, not elected. So, the theory goes, they are above pandering to the electorate and are free to make politically unencumbered monetary policy decisions. The Fed's independence may have been weakened a bit in 1977 when Congress gave the bank a dual mandate to fight not only inflation but unemployment as well.
How does this full-employment mandate influence policy? Well, the Fed's new goal of keeping economic activity brisk lets them justify insulating the government from the interest rate consequences of its deficit spending policies. To enable the expansion of the national debt, the Federal Reserve has been openly manipulating the interest rate down by setting the "fed funds" rate near zero (free money, for cryin' out loud!), setting liberal reserve requirements for member banks to stimulate lending, and, in the last two years, by actually conjuring dollars out of thin air and using them to buy government bonds at below-market interest rates. The fashionable name for this activity is "Quantitative Easing"; the traditional name is "money printing". It is the bane of sound money and raw meat for gold bugs.
The nearby chart shows a 21-fold explosion of US Government obligations from 1980 through (estimated) 2016! Debt grew roughly 9% a year from 1980 to 2011. In the same period, GDP that ultimately must support the public sector obligations grew less than 6% a year; even slower in the recent years.
The currently outstanding US debt is $14.3 trillion; by year end it'll be $15 trillion or almost 100% of US GDP. Just the current fiscal year deficit of roughly $1.5 trillion equals 10% of GDP. As of this writing, US debt is at the legally authorized debt limit and causing all sorts of political commotion. But our government goes on spending 60% more than it takes in! It's almost unbelievable. Studies have shown that economies with deficits equal to 40% of their budgets (as the US has today) tend to descend into hyperinflation! We have to ask ourselves if that could possibly happen here.
No one should be surprised, then, that last month (April 2011) Standard & Poor's Rating Service downgraded its long-term outlook on US debt to "negative" from "stable". They said, "We believe there is a 1-in-3 likelihood that we could lower our long-term credit rating on US debt within 2 years." The report alluded to S&P's assessment that there is no evidence of any serious effort to arrest the government's financial deterioration. We very much concur.
When concerns about currency debasement or outright devaluation of a particular country's fiat money are ascendant, the first instinct of investors and businesses that denominate their affairs in that currency is to find shelter in other freely-traded currencies. Worried about the US Dollar? Then hedge with Euro futures; that sort of thing.
But what if there is widespread concern about all the world's major currencies? The Euro, Yen and perhaps the Pound Sterling are considered by most economists to be in even worse credit condition than the Dollar! A business or country or investor who needs to hedge against the risk of devaluation in all these currencies needs a liquid alternative. Gold heads a very short list of choices.