The fact is, the government sponsors of all four of these dominant currencies have created widespread misgivings about their stability by incurring unprecedented levels of debt to support huge and seemingly endless operating deficits. These deficits, in turn, result from an unwillingness to control the cost of social benefits, and a strong instinct for "bailing out" their equally undisciplined private banking systems.
A debt/deficit tornado is sweeping across the world's mature industrial economies; but credit markets continue in denial of the seriousness of matters, accepting interest rates that bear no relationship to the serious default risks.
It seems more and more likely that governments who have gotten away with "kicking the can down the road" will come to the end of the road sooner than later. It won't be pretty. It probably won't even be orderly. This is precisely what's driving investment demand for gold. Solve the Debt/Deficit problem and I think the dollar price of one ounce of gold will drop into three-digit range. But, fail to solve it within the next few years and the sky's the limit!
The Other Demand Factors
The prospect for monetary inflation is, we think, the main driver of gold's price. Here are a few others:
Speculative, price-sensitive demand... aka "momentum" traders. One place that government's newly-printed, nearly-free cash flows most readily is to hedge funds and other fast-money trading enterprises. They are certainly "onto" gold, and they are an influence to be reckoned with, especially in the short term.
Growing prosperity in the emerging markets which have traditionally regarded gold as a store of wealth and status symbol. India is the world's largest gold consumer, absorbing 20% of world gold production last year. China has become the leading producer (over 13% of world production) AND imports gold besides!
High valuations for stocks and bonds tends to increase gold's relative attraction as an investment. Readers know we are
believers in the ability of freemarket businesses to adapt to the economic and monetary climate, so our preferred investment class is common stocks. But in light of the slow debt-burdened outlook and very high current valuations, our commitment to stocks is risk-aware. We have room in our portfolios for a big defensive position in gold.
Rising international stress increases interest in gold as a "safe haven" during crises. North Africa, Middle East anyone?
