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What happens to Gold as economic depression worsens into a catastrophe?
Gold has stabilized in low 700s. But the economy is accelerating downward deep into the South Pole. The economic implosion is happening as most companies may shut their doors in the next several months and years.
Gold price is a mathematical function of two things – easy money and budget deficit. We know what has happened to budget deficit. The key question for gold buys is one – is money really cheap?
The answer is no. It is not easy to get free credit from anywhere. That is why the economy is collapsing. That is the root cause of all troubles. The banks squandered their loan assets and are now virtually bankrupt.
The budget deficit is ready to take gold to $3000 an ounce. But that needs easy money to get started. The catalyst is missing while potential energy for the move is present.
So what really happens to gold? The answer lies in what the Obama Administration will do. They can defy all norms and start providing easy credit to all, tripling Bush budget deficit. If that happens, gold will go to $5000 an ounce and US Dollar index will fall below 30 from the current level of 86.
On the other hand if Obama Administration starts handing out raw money to people and restricts their extravaganza to moderate inflation of budget deficit without really creating easy money, gold will stay at current levels or perhaps follow south in sympathy with the deflationary forces in the economy.
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