I've recently come across a couple of articles on the internet in which gold bulls are warned: if real interest rates rise, gold prices will plummet.
It is quite true in theory, but I do not see how central banks or the Fed can choose for QE2 (quantative easing - i.e. increasing the money flow to keep the economy afloat) combined with historically low interest rates to then suddenly raise interest rates at a later stage to fight inflation.
Inflation will be high in the coming years, no doubt about that. But raising interest rates is something you can only do if the economy is no longer in dire straits. In this respect, central banks worldwide are in a stale mate situation. Japan is the best example of this. Low economic growth, a fast decreasing working population, rising unemployment rates, troubled pension funds and structurally low interest rates that simply cannot be raised.
To therefore talk about the potential price of gold in the coming years is absolute nonsense, because if gold is worth $10,000 in 2012, what does that even mean if purchasing power of the dollar has decreased substantially because of QE2?? Indeed: it means nothing at all. The only constant factor is gold and it would be more correct to actually measure the value of a currency in ounces of gold.
I fail to see governments with long-term visions about all this. At present most governments seem to be more occupied with preservation of the current system rather than implementing true reforms. The world is at a major turning point in history as anticonception and improved economies worldwide have led to historically low birth rates which means that in the 21st century the growth of the world population will come to an end. This is serious, because all our models have always been counting on growth. Growth of the economy, growth of populations and working populations especially. Pension funds will not be able to 'price in' inflation corrections anymore and more and more of the elderly will be in trouble in the coming decades if reform does not happen quickly. Europe and Japan are the worst cases in this respect with their low birth rates and ageing populations.
So what do governments do? They focus on getting women to work full-time, which again leads them to postpone or even cancel their decisions to have babies! What's left then? Immigration. European governments are trying to attract more and more immigrants, especially from exotic countries which then leads to social tensions because of their assimilation issues in European societies. And all these problems are created to ensure that we can hold on to what we have: a system of a declining working population paying for ever-increasing groups of unemployed and retired people.
What does this all mean for gold? All currencies that the world has ever seen have collapsed because of man's greed and gold has always been the most reliable preservation of capital. Gold plays a role in the Bible, in the Koran, in Hinduism, is considered sacred in Buddhism and goes back all the way to Greek mythology. So will I be worried if interest rates suddenly rise? No. Gold is in my vault and it will stay in my vault.
11 October 2010
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