May 16, 2012 - What is Happening with Gold?

The price of gold, at least in terms of dollars, has been in a rut.  As of this writing, it is down to around $1,540 per ounce.  After 11 straight years of gains, many are wondering if this is the end of the gold bull market.

Of course, some of the weakness is due to the U.S. dollar.  It's not that the dollar is that great, but with all of the problems in Greece and Europe in general, the euro has been down quite a bit.  Therefore, for Europeans, the price of gold is not down as much.

I think these retracements in the price are always a good test for people who own gold or gold related investments.  The true believers stay in the game.  The ones who don't really understand why it is important to own some gold are the ones who are scared off.

Sometimes I am asked if I think gold will continue to go lower.  To be honest, if I knew the answer with any precision, I would be incredibly rich.  I would be trading futures every day and raking in money like Warren Buffett.  But there is no way that I can predict the short-term price movements of gold or anything else.

If there is one thing that Austrian school economics teaches us, it is that economics depends on human action.  I cannot predict how billions of people in the world are going to act tomorrow and I therefore cannot predict what the price of gold will be.  Maybe some futures trader in Singapore decides to get into a huge position tomorrow.  Maybe a whole bunch of Indians decide to buy gold for their daughters.  Maybe Ben Bernanke makes a special announcement that the Fed is changing its policies.

Because of all of the variables, it is impossible to predict the short-term price movements.  But we can make some predictions with a certain degree of accuracy.  We can predict that the U.S. federal government will continue to run up debt and spend money like crazy in the short term.  We can predict that the Fed will continue to monetize debt in the future if it feels it is necessary to keep interest rates down or to keep a major crash from occurring.  We can predict that an increase in the money supply will likely lead to an increase in prices, especially in things like gold.

I can't even be certain that the Fed will continue to inflate.  Strange things can happen in this world.  Maybe Bernanke will resign and someone new will come in and stop monetizing debt.

While I can't be certain that gold will go up in terms of U.S. dollars, I think it is highly likely to happen over the next few years, given the circumstances.  With that said, if you have been a procrastinator in buying gold and gold related investments, now seems to present a good opportunity.  Again, it may go down more in the next few weeks or months, but if I could call the exact bottom, I would be really wealthy.