Trend: Gold prices are boosted by the flight to safety and hedging against inflation, while asset liquidation and deflation drive the price down.
Charles Hugh Smith looks at the four forces acting on gold and tries to make sense of recent price action. Click on the link below to read his chronology of trends in gold prices since 2007.
Charles Hugh Smith sees four forces acting on the price of gold. Acting in opposition at times and in concert at other junctures, these forces make a mockery of any simple explanation of gold's wild price action.
1. gold as a safe haven--"flight to safety" in volatile, risk-averse times
2. gold as a store of value and hedge against inflation
3. gold as an asset to be sold to raise cash to pay down debt that is due
4. gold as an asset which becomes less attractive in deflationary eras
Here's the bottom line:
All this suggests that gold's short-term price swings depend on the global financial situation. If deflation is once again foreseen as a risk, and cash must be raised quickly to pay down debt or make interest payments, then recent history suggests gold could swoon as it did in late 2008.
If global economic growth resumes, then gold's long history as a hedge against inflation suggests the current uptrend could continue unbroken until the next global financial panic occurs.
To assume new highs will be reached on a "flight to safety" ignores the lesson of 2008: gold is subject to losing a third of its value in short order if a liquidity crisis forces players to sell anything in their portfolio that still has value to raise desperately needed cash.