How high can gold go?

Nobel Prize-winning economist Paul Krugman says the U.S. is in the "early stages of a third Great Depression

http://www.nytimes.com/2010/06/28/opinion/28krugman.html

Could this be why?

Originally posted by Metal Brain
Nobel Prize-winning economist Paul Krugman says the U.S. is in the "early stages of a third Great Depression

http://www.nytimes.com/2010/06/28/opinion/28krugman.html

Could this be why?

Depressions generally cause deflation (or keeps inflation at very low levels). So by itself, this would not be good for gold.

the investors willing to invest in high-priced gold would be betting that this depression leads to the passage of new and enormous stimulus packages that lead to runaway deficits leading to countries having to print huge amounts of money to avoid defaulting on their debts.

But the election of anti-stimulus pro-balanced budget conservatives would definitely throw a wrench into this scenario.

Originally posted by Melanerpes
Depressions generally cause deflation (or keeps inflation at very low levels). So by itself, this would not be good for gold.

the investors willing to invest in high-priced gold would be betting that this depression leads to the passage of new and enormous stimulus packages that lead to runaway deficits leading to countries having to print huge amounts ...[text shortened]... i-stimulus pro-balanced budget conservatives would definitely throw a wrench into this scenario.

You are wrong.

http://inflationdata.net/precious-metals/gold/gold-investment-inflation-deflation/

Originally posted by KazetNagorra
I don't see the fundamental reason for an inflation-adjusted price increase of 200% over the last decade. Did we invent some new application for gold in the last decade that would make it more useful?

hedging/hoarding is an old application, it doesn't need a new one.

Originally posted by Metal Brain
Nobel Prize-winning economist Paul Krugman says the U.S. is in the "early stages of a third Great Depression

http://www.nytimes.com/2010/06/28/opinion/28krugman.html

Could this be why?

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Originally posted by Metal Brain
You are wrong.

http://inflationdata.net/precious-metals/gold/gold-investment-inflation-deflation/

the article more or less says the same thing I was saying

Gold is also an excellent hedge in periods of deflation. What is happening in times of pronounced deflation? Public budgets are strained, the financial sector is faced with systemic problems, currencies are depreciated in order to reflate the system, and the money supply is continuously rising. The creditworthiness of companies and countries is queried, the confidence in paper currencies falls, and gold is subjected to remonetisation.

If the government enacts a lot of various "stimulus" measures, the effect of this can be a future increase in inflation.

But by itself, a depression is going to have a deflationary effect -- and if, as now seems to be the case at least in the US, the political winds favor avoiding or blocking stimulative measures and instead focusing on cutting spending and balancing the budget, then gold prices are going to be hit hard.

Another thing to consider is that in the US, at least, the prevailing monetary policy has been to be extremely quick to clamp down at the first sight of inflation -- the memories of the 1970's are still rather strong and no one wants to go back. So even if inflation was to start emerging as the economy recovers, the Fed is likely to crack down quickly enough to keep it well under control.

You said deflation was not good for gold. That was clearly an incorrect statement.

Originally posted by Metal Brain
You are wrong.

http://inflationdata.net/precious-metals/gold/gold-investment-inflation-deflation/

Haha, so gold is optimal for deflation AND inflation? What's next? Good for rain AND sunshine?

Originally posted by Metal Brain
You said deflation was not good for gold. That was clearly an incorrect statement.

I said that deflation by itself was not good for gold -- I also said that deflationary conditions might cause governments to act in ways that cause future inflation. And that is what the article also said.

the article you linked to also has a nice little graph showing the close correlation between the price of gold and "expected inflation" -- so if investors are expecting lower levels of inflation or outright deflation, the price of gold goes down.

Gold does well during a deflationary depression. It is a fact.

Originally posted by Melanerpes
I said that deflation by itself was not good for gold -- I also said that deflationary conditions might cause governments to act in ways that cause future inflation. And that is what the article also said.

the article you linked to also has a nice little graph showing the close correlation between the price of gold and "expected inflation" -- so if inv ...[text shortened]... rs are expecting lower levels of inflation or outright deflation, the price of gold goes down.

We are already experiencing disinflation and what is gold doing? It is not going down as you say, it is going up. The expectation of deflation can do that. You are wrong, why don't you just admit it?

Originally posted by Metal Brain
We are already experiencing disinflation and what is gold doing? It is not going down as you say, it is going up. The expectation of deflation can do that. You are wrong, why don't you just admit it?

are you saying that the chart in your article that shows the close correlation between "gold prices and expected inflation" is wrong?

Originally posted by Melanerpes
are you saying that the chart in your article that shows the close correlation between "gold prices and expected inflation" is wrong?

No, not at all.

We were talking about deflation, remember?

okay -- I agree with the chart -- the price of gold is closely correlated with the expectation of a given level of INFLATION.

according to the chart - an expectation of low inflation (or deflation) will cause the price of gold to drop

now if an existing deflationary situation causes people to expect government responses that will cause inflation levels to rise in the future, then yes, a deflation can INDIRECTLY lead the price of gold to go up.

on the other hand, the reason why Krugman is so gloomy about the future of the economy is because he believes the government is going to be more focused on belt-tightening and budget balancing than on enacting new big stimulus plans - things that will have a deflationary effect on the economy - so in this instance, the people expecting lots of inflation in the future are likely to be disappointed.

Originally posted by KazetNagorra
I don't see the fundamental reason for an inflation-adjusted price increase of 200% over the last decade. Did we invent some new application for gold in the last decade that would make it more useful?

Yes. We discovered that it is a more reliable investment than US dollars.
Gold is largely a currency and should be analysed as such. If the dollar had increased in value relative to other world currencies, would you similarly be suggesting a bubble?