Hi Bob Y. A while back, you kindly invited me to post re: deflation v. inflation, how will that affect the price of gold. I also lurk on this thread and see some very good discussion. I think questions often raised here are best answered by going back to the obvious. (Forgive hte parts where I tell you what you already know).
The primary intrinsic value of gold is its usefulness as medium of exchange. Currently, we use paper with portraits of Presidents or nice animals instead. The problem with paper is that the govt/Fed Reserve can and does arbitrarily change the amount of it without telling anyone. In fact, the ONLY purpose of using paper, instead of something like gold (the supply of which cannot be manipulated) is so that the gov't can "manage" the alternating boom and bust business cycle (Which ironically govt and the fluctating money supply is the sole cause of in th first place). The public at large accepted the use of unbacked paper for a variety of cultural reasons and intellectual fashions of our times, including Keynsian economics. And govt loved the idea, among other reasons because it allows for hidden taxes and transfers of wealth doled out to the highest bidder or to itself (by selling debt perhaps and paying it back in inflated, devalued currency).
But despite intellectual fashion as well as the godlike omnipotence of our elected officials, the fluctating money supply remains a problem. It ruins our only basis for valuing goods and services and distorts the resulting allocation of resources (resulting in loss of overall wealth). When the money supply increases, you and I think we the equivalent of more real stuff. But what actually happened was that the number of dollars increased without a correlated increase in stuff. We buy more limos than we otherwise would, knowing that we'll have plenty leftover for the winter food purchases (BOOM). But say by winter, the supermarkets owners have had enough time to realize what's really going on. They raise prices in proportion to increase in money supply. Suddenly, I don't have enough money for food because I spent too much in Limos. Uh-oh (Bust). The resulting reallocation of resources is painful but very possitive long term. Nevertheless, we call it a "recession" or if its really bad a "depression." The governmetn needs to "manage" this, so the credit again expands amd money supply increases amd the cycle begins again (even more is necessary this time).
A return to an esentially unchanging money supply is the only cure of these problems. For a variety of reasons, gold is just about the only viable choice (that's another post).
MOST PEOPLE DON'T REALIZE THAT BEING LONG ON GOLD IS A BET ON HUMAN PROGRESS, MUCH LIKE TAKING A LONG TERM BUY AND HOLD APPROACH TO THE STOCK MARKET (I.E, THE ECONOMY) IS. NOTHING IS MORE OBVIOUS THAN THAT THE SUPPLY OF A MEDIUM OF EXCHANGE MUST REMAIN FIXED. OUR CURRENT MONETARY SYSTEM IS AN ABBERATION, WHICH WILL WITHER AWAY LIKE COMMUNISM, WHEN IT FALLS UNDER THE WEIGHT OF ITS OWN STUPIDITY.
Okay - the above ranting gives me a good framework to evaluate current factors re: price of gold. What we need is loss of confidence in the monetary system at large.
WHEN WILL IT FLY?
Whenever defaults or problems occur on all that govt, corp and invidual debt. Could be percipitated by economic slowdown, or having so much debt that even waht would otherwise be BOOM times can't handle it, or a stock crash, leadign to margin calls, defaults, no more money to loan etc.
Currently, some truly positive factors are benefiting the economy, puttign off the day of wrath. But much of the "BOOM" remains as fictional as those of days gone by.
Inflation or Deflation?
Watch the govt(s) for thr answer to this
Inflation - will occur if the govt chooses to handle its debt problem by paying it back in deflated currency. When there's lots inflation or hyper inflation, people see first hand what is always going on to one degree or another. But now the change in the value the nice paper is so frequent and extensive that the medium of exhange ceases to serve its purpose entirely. That's why in Germany, they stopped wheeling their money to the corner store, took matters into their own hands and used Gold. The only logial thing to do, unless you want to go back to trading 3 loaves of bread for 48 combs. For this reason, gold is somewhat ambiguously called an "inflation hedge."
Right now we have inflation but don't know it (hence low gold price). In fact, lets make up an new inflation index, the CTI ("Consmer Thing Index"). Lets include goods, services AND SECURITIES. By my tally, it goes up very significanly each quarter. (Gee, a dollar buys a lot less Coke Cola Co than it did when I was a kid). Of course, people don't see the CTI as high, because they think real value Coke Cola Co has skyrocketed. But the inevetible cold, hard slap in the face will come, together with disillusionment and a loss of confidence in the monetary system (whether or not we get additional inflation).
Deflation - will occur if the govt chooses to handle its debt problem by defaulting (in one form or another). Will result in a string of other defaults and a contraction of money people were counting on (BUST). Because of the sheer amount of debt and money people where countign on, it will be the Mother of All Busts (Transitions/ Reallocations/ Clear the Decks Years). Not unlikley, the monetary systems role in all this will be realized, with resulting loss of confidence and price of gold going higher, even without inflation. Add maybe, just maybe, we'll even necessiatate and trigger the inevitable tiumph of gold and the end of paper money.
That's why gold is hoarded.
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