WHAT MAKES GOLD RISE?

 

There are those who believe that gold is simple.  It is an inflation hedge.  It runs inverse to the dollar.  Just figure out the Real Interest Rate (nominal minus inflation) and gold is a guage of how negative that is.

But all of these things are symptons.

Gold is a stability hedge. 

Inflationa is destabalizing.  A falling dollar is destabilizing to dollar denominated assets.  Negative Real rates destabilize an economy.

But is it the instability that gold measures.  Some stability factors are obvious:

As the dollar weakens as a result of a weakening economy - or as a result of other countries moving away from using the dollar to settle large international commodity trades - like oil - gold must rise in dollar terms. 

As the US government piles up debt and must issue more and more dollar denominated debt to fund itself, and corporation must issue more and more dollar denominated debt to fund themselves and consumers go into debt to fund themselves more and more dollars chase fewer goods.  This is highly unstable and inflationary.  Gold rises.

Also as the economy weakens yet the Fed is unable to support the risk markets because of inflation this is very destabilizing and it takes away gold main competitor.  Thus  gold rises.

These are the obvious driver of gold and right now these drivers alone are very destabilizing to the economy and hence very supportive of higher hold prices.

But we live in a uniquely unstable period.  Politically we have politicians at the highest level devoted to destabilizing the judicial system.  This is tremendously deleterious to the dollar which depends on having the world's most stable judicial system in which to settle dollar denominated contracts.  Creating doubt in that system casuses more long term instability than almost anything else.

Internationally we have entered a period of De-GLobalization, Eastern Bloc BRICS + are seen less and less a healthy competion to the Western economies and more and more as Enemies.  It is impossible to stress how destabilizing that is for the global economy and how inflationary that will prove to be in the long run.

And finally gold more than anything measures confidence in the global Central Banks.  As these Central Banks begin to lose their abitlity to support the risk markets without causing massive inflation the rising price of gold is a measure of public loss of confidence in them.

So if you see the intstability you should buy gold.  If you don't see it, or you just think it's a lot of overblown hype - there's no need.