I want to clear up a potential misunderstanding about gold prices.
Last Friday, Ed Steer wrote "And Then There's This".
So, regardless of what the dollar does, both gold and silver could explode to the moon tomorrow if the four bullion banks that are sitting on their respective prices would either start covering their grotesque short positions, or fold their arms and do nothing...i.e. don't go short against virtually every long that's being placed...which is what they've been doing now for the last 10+ years.
My reaction: Ed Steer isn't wrong, but comments like this can be misleading (I am guilty of making this type of comment too). As a result, some investors now believe that the purchasing power of gold is going to explode.
The reality is that the price of gold in stable currencies will only increase 2 to 5 times (they could briefly spike higher), and the odds that "gold and silver could explode to the moon" in terms of yuan is zero.
As I wrote in *****Ten Major Threats Facing The Dollar in 2009*****, rallying gold prices are a herald of a dollar collapse more than anything else.
Rising demand for physical gold is a threat to the dollar because it signals a growing loss of confidence in the paper currency. It is also key to understand that gold prices aren't rising because of the changing fundamentals of gold, but because of the changing fundamentals of the dollar. In other words, gold isn't rallying, THE DOLLAR IS FALLING.
Gold is history's oldest and most stable currency. Its utility is simply that it is rare, and for 5,000 years people have used it to store value for the future. All the gold that has ever been produced would fit in a solid cube of about 19 meters on each side, and this cube is only expanding by about 12 centimeters a year (2%). Since the value and supply of gold itself are fairly constant over long periods of time, the main driver of gold price fluctuations is the ebb and flow of confidence in paper currencies. Rising gold prices are, therefore, a signal of a weakening currency, which is why governments hate them and try to suppress them.
Right now, there is unprecedented worldwide demand for physical precious metals. As a result of this surging demand, gold futures have experiencing backwardation, a rare market condition where gold futures trade under spot prices. It is a signal that gold prices are headed higher and that confidence in our currency is fading quickly. When gold prices break above 1,000 again, the event should be recognized for what it is: the herald of a dollar collapse.
The value of gold over centuries
To put where gold prices are headed in context, here is a chart of the value of gold over the centuries.
In five years, I would expect gold to be somewhere between $2,000 and $5,000 on this chart.