John Maynard Keynes called gold “the barbarous relic”. Now, long after Keynes’ school of economics became unfashionable, gold is once again in fashion, hitting an all time dollar record even when other metals and commodities have dived in price as a result of poor industrial demand. So what is driving the gold price?
Economists do not agree and there are two competing explanations. The first is that the world is anticipating a sharp inflation. This is because governments are creating a large amount of paper money as a result of the “Quantitative Easing” programs. This is the way that central banks are trying to stave off depression by creating money and using the vast majority of the money to buy government bonds which in turn drives down interest rates. This has not, yet, led to an increase in prices. This is because firms and consumers are saving and this slows down the speed of money. Once people start spending again then they will have much more money to spend and prices will go up. Gold is simply anticipating a great inflations and the gold price will either stay more or less where it is or go even higher.
Another school say that the market is simply sticking with what seems solid. Money, stocks and corporate bonds have been a poor store of value. Gold is a safe haven, which is guaranteed to keep some of its value. When the market returns to normal there will be no need for a safe haven and the gold price will gently deflate.
At the moment the gold price is at a historic high to the dollar. Gold mining output is actually declining, although there is plenty of exploration for gold and old mines can be bought into production. Similarly consumers selling jewelery to be melted down seems to have peaked.
In the end no-one knows where the gold price is likely to go. So far it seems to have defied gravity for a long time, and if we had to call it we’d say that won’t last.