Peter Tenebraum's 'acting man' post is certainly the best financial blog around. He makes the point repeatedly that gold is not an industrial commodity - it is a CURRENCY.
As such Gold's value will always be determined by monetary/investment demand.
In Peter's words:
In short, it is monetary or investment demand, which in turn is technically divisible into outright new demand and reservation demand, that is the main driver of gold's price. If one wants to analyze gold's likely price trend, it would be perfectly legitimate to completely ignore annual mine and scrap supply and annual industrial and jewelry demand for gold. One might perhaps mention these as 'marginal factors', but they really are unimportant in terms of the bigger picture. Instead, one must concentrate on the factors driving above mentioned monetary demand.
These factors are, in no particular order:
1. the level of real interest rates (i.e., nominal interest rates minus market-based inflation expectations),
2. the dollar's exchange rate,
3. the rate of growth of the true money supply, (different from the Fed's money supply which leaves out an vast array of Treasury/Fed/Foreign bank demand deposits)
4. the steepness of the yield curve, (currently heavily manipulated)
5. credit spreads (and other indicators of waxing or waning economic confidence),
6. the desire to increase or decrease savings, and
7. confidence in government, the monetary authority and the financial establishment generally.
Now - real rates are still negative; True Money Supply is still exploding; and confidence in government is waning. All these trends are - as of now - perpetual one way trends.
Gold has clearly taken a big hit lately. But the true measures of FUTURE VALUE are still clear.