Thursday, May 6, 2010

Gold Bugs

For much of 2009, financial pundits were worried about the fear of inflation coming back, fueled by the massive deficits our federal government was running. The upside of this was that there were ways for investors to take advantage of inflation, especially by investing in gold. Many investing experts thought that inflation would support gold prices - or conversely that the rise in the price of gold was the result of inflation fears. There were stories to this effect on such respected financial Web sites as TheStreet.com and Seeking Alpha.

Well, we seem to have dodged the inflation bullet (for the moment at least). On the other hand, gold prices have held up lately, despite the waning of the inflation fears. Now, yesterday morning, Bloomberg News featured an interview with the chief economist for the Canadian wealth management firm Gluskin Sheff, talking about the threat of deflation. According to Bloomberg,"Deflation will push gold prices to record highs.... the precious metal will reach $3,000 in the next several years."

So inflation would drive the price of gold higher, and deflation would drive the price of gold higher. It seems the only way for gold to fall is if consumer prices stay exactly the same.

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