Reply #72: Gold [View All]

Gold rises with two things: Other prices and money supply. Both of those take it in the butt during a recession. In 1999-2001 gold prices were down as the Fed raised rates and a slowdown looked likely and eventually came to fruition.

I agree that gold prices go up with an increase in the money supply, and that they were low in 1999-2001. But they weren't much lower in 1999 than they were in the 2 years from 1997 to 1999. Gold prices when there are better investment opportunities. If returns on investments go down, other avenues of investment become better opportunities. If consumer spending declines, returns on capital investment ultimately declines. Thus, if little in the way of productive investment opportunities exist, gold price rise, just like bond prices. More investment money goes into bonds and gold, and less goes into stocks or any forms of true capital investment. Though a money supply contraction should drive gold prices downward, it's almost inconceivable that Bernanke would let a money supply contraction occur. At least, not without a fight. Even still, once the money supply starts increasing again, it will push gold prices higher again.

If the Fed truly did concentrate on fighting inflation alone, and used real inflation measures, instead of artificially low Consumer Price Index, then gold price increases would be limited. But the chances of the Fed fighting inflation alone, and using a real measure of inflation as a guide, are zero.

As the economy sinks, the Fed will drop interest rates and increase the money supply. And if this fails to halt the downward trend, even more money will go into gold instead of the stock market or capital investment.

Gold will remain a good investment. The only question is how good. Bonds may also remain a good investment. But bond investment requires a large amount of trust in the U.S. Government. And that's something I don't have at the present time.

Below is a graphic representation of gold prices, suggesting gold price suppression from 1996 to 2003. Note, however, that gold prices changed little from December 1997 through December 2001. It appears that the 2001 recession had little price-suppressing effect on gold. However, the drop in interest rates, the expansion of the money supply, and all other measures to fight the recession has a price-increasing effect on gold.



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