Strong Demand Will Not Send Gold Price Higher

Gold is original money. As such, it is the measure of value for everything else.

Gold was money before the US dollar and other paper currencies. All paper currencies are substitutes for gold, i.e., real money.

So, how much is money worth? Money is worth what you can buy with it. In my article A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold, I compared the cost to purchase bread and gasoline over the past one hundred years using US dollars vs. gold.

The article illustrates the single reason that separates gold from all other forms of money: gold is a store of value; nothing else is. 

Below is a question that prompted my response in the form of this article:

"It seems to me that with all the unemployment, people are going to be more aggressive in getting handouts, and spending them all the quicker. That along with both Iran and China wanting gold, and others seeing this, isn't that going to be good for gold?"

In other words, "will spending the handouts faster accelerate the effects of inflation, thereby exacerbating demand for gold by others, including Iran and China; thus sending the gold price higher?"

In the original question, the phrase "good for gold" implies that increased demand for gold will send its price higher. But that is not the case.

PRICE OF GOLD IS ALL ABOUT THE US DOLLAR

It is not demand for gold which sends its price higher. The only reason that the price of gold increases is because of the loss in purchasing power of the US dollar. 

Gold is quoted in US dollars and the dollar is the world's reserve currency. The price of gold in US dollars is an inverse reflection of the value of the US dollar. Changes in value of the USD are continuous and ongoing. Sometimes there are changes for short periods of time which don't seem to correlate exactly to changes in purchasing power of the U.S. dollar.

However, lasting changes occur after longer periods of time when the cumulative effects of inflation are recognized more fully by holders of the depreciating paper currency (i.e. U.S. dollar). Since paper currencies (including government debt) can be manipulated by government, expectations and reactions can become more volatile. In addition, the effects of the inflation become increasingly unpredictable.

The same fundamentals apply if gold were to be priced in any other currency or money substitute.

"If gold is priced in yuan, then everyone will simply monitor the price of gold in yuan going forward. But that will not tell us anything new or different about gold. It will tell us only what is happening to the value of the yuan. Because, at that time, the price of gold becomes a direct reflection of the changing value of the yuan."  (see Gold And The USD/CNY - Its Still About The US Dollar)

If it were possible for one individual or one country to own all of the available gold in the world, the transfer process or end result would not make gold more valuable. It would only concentrate real wealth in fewer hands.

If a billionaire loses his entire fortune because of a series of bad investments and business decisions, and all of his money and property ends up in someone else's hands, that does not change the value of what was lost. What it does represent is a transfer of wealth.

Anything less than a total and complete transfer is simply wealth transfer on a more limited scale.

DEMAND FOR GOLD IS A DEMAND FOR MONEY

Historically, when people have turned to gold in dire situations, it represented a demand for money  - real money; not new demand for gold.  And it resulted from unacceptable alternatives (fiat paper currencies, etc.)

All currencies are substitutes for real money, i.e. gold. And all governments inflate and destroy their own currencies. Whether gold is priced in yuan, SDRs, or dollars, doesn’t matter.

The case for gold is not about price (in any currency). It is about value. Gold is real money and a store of value.  Gold's value is historically stable and constant.

(Also see How Much Is Gold Really Worth? and Gold And The Elusive Chase For Profits)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN'T, AND WHO'S RESPONSIBLE FOR IT and ALL HAIL THE FED!