Why is gold doing so well?

If you look at the following chart, we see gold has outperformed the S&P500 for the past two years.
If you look at longer time frames, gold continues to outperform all other asset classes.

Why?



1) The simple fact is a credit economy is dependent on inflation. The Federal Reserve does not have a zero inflation target, but a 2% inflation target. That means each year, without considering any other factor, gold should rise 2%. This base increase in the price of gold year after year is important.

2) WIth the large amounts of credit and the complex financial transactions, the financial system has wrung out every efficiency from the system. The amount of gains from trade in financial transactions has slowed and may be negative as some trades that don't work are reversed.

3) A financial meltdown is always more severe and longer lasting than normal recessions. When you add a system that depends on complex financial transactions to survive, the world has become a scarier place. The problems are greater than the systems ability to solve them. The net result is a rush to safety. You just cannot devalue all the currencies at the same time. The race to the bottom of the currency world will propel gold to new highs.

4) You have a huge wealth transfer from the West to the East. The problem is the wealth has all be in US Treasures. How to pay off the Chinese for all the goods we bought? Inflate the dollar and pay them back with lower priced dollars. It is a tried and true method of paying your debts when you control the printing presses.

5) Because of the new wealth of the East, their central banks are uninvested in gold. They don't have the reserves of gold that were bought by Europe and the US in the 1800 and early 1900s. As a result, China, Russia, and a host of countries are increasing their central banks reserves of gold.

Future of gold? Until the US has a balanced budget, I cannot see the price of gold falling for a significant time. The best, easiest, and only possible political solution to the massive government debt is inflation. Until the debt is brought under control and the Fed is not FORCED to print money, gold will be one of the best investments for US citizens.