Gold is one of the hottest topics of these days, as many forex traders note the new records broken by the commodity, and speculate on the sparkling future awaiting those who prefer it as an investment medium. Gold had been doing very well over the years as the global flood of money caused just about any tangible asset to rise in value, including real estate, commodities, stocks, and many others. In these difficult times, gold’s rally has been one of the more resilient, supported by its role as a safe heaven in times of crises of confidence, and its ancient character as a store of value. Many are further convinced that the extreme fiscal irresponsibility of the government, and the unlimited and general bailout policies of the Federal Reserve will eventually result in a collapse of the American economic system, against the turmoil of which gold is seen as a good insurance. In this context, how high can gold go, and what may halt its insistent ascent?
It’s common knowledge that the rise of gold depends on the two factors of inflation, and fear. Usually, inflation occurs when the economy is growing, and when there’s growth, there’s little sign of panic or fear among market participants. Inflation leads investors to diversify, and gold appreciates. In the other case, where fear prevails, gold is expected to appreciate as a source of safety against the unreliability of other kinds of financial assets. Although so far gold has not demonstrated that conviction forcefully, as investors flock to government paper in times of crisis, its quick return to popularity shortly after periods of turmoil demonstrates that traders attach fundamental value to the asset at times of long-term uncertainty. Still, as we see, the two conditions of gold’s appreciation are more or less mutually exclusive; if there’s inflation, there’s probably little fear, and if investors are fearful, inflation is likely to be subdued.
The mega-bull gold market, if we substitute this term for a gold bubble, would materialize if these two factors of fear and inflation can somehow come together to create optimal conditions for very sharp appreciation. If dollar begins to depreciate out of control, even without domestic demand, inflation would be inevitable, with widespread panic and fear leading to the complete destabilization of the system. If the U.S. dollar ceases to inspire confidence as a source of value, gold could easily skyrocket to astronomical levels of many thousands of dollars.
The problem with the “Gold 5000” or more scenario is that it is very difficult to see the dollar lose it’s status as the global currency in the next five ten years barring a major economic cataclysm destroying the international financial system. With about two thirds of global reserves denominated in the U.S. dollar, most of the debt issued in the world is also sourced through some kind of dollar borrowing, which leads to the currency gaining in value as economic confidence evaporates. The financial actors, including governments, and major financial institutions will do anything to prevent a dollar collapse. But they may fail given how optimistic their assessments usually are, and if they do, nothing will be able to halt the rise of gold.
No forex trading course or government briefing will tell you how to anticipate such a situation, and the only way of avoiding being at the bottom of the list of losers is remaining up-to-date with the commodity market at all times. One thing is for sure: gold has held its value over the centuries, and it will remain an attractive asset regardless of the wisdom of future decisions taken by politicians and investors.