Monday, December 12, 2011

Will Gold Shine If The Economy Collapses?

The doom and gloom crowd have been big advocates of buying gold. However, as shown by the big decline in the price of gold today despite an increase in jitters about European debt, there are no guarantees that the price of gold will rise if the economy collapses.

One of the primary rationales for buying gold is the assumption governments will turn on the printing presses and expand the supply of fiat money in order to pay for decades of spending more money than they are collecting, As the public loses faith in debased paper currencies, many expect the demand for gold will increase exponentially.

However, the price of gold is determined by the laws of supply and demand. Gold is worth what the next buyer is willing to pay for it. If the economic situation becomes so bad that holders of gold are forced to liquidate their holdings in order to raise cash, then the price of gold will go down as the supply on the market goes up. Over at Zero Hedge, Tyler Durden is suggesting that banks may be selling and lending gold to raise much needed cash. This may be creating short term weakness in gold.

My opinion is that gold is likely to increase in value as the budget deficit driven debt crisis hits Europe in 2012  and the U.S. within the next few years. However, anyone that is considering buying gold should be very aware of the risks of owning the shiny metal. Gold is definitely not a risk free method of preparing for an economic collapse. Do not discount the risk to the market of an economic collapse requiring massive liquidations of gold and holding down its price.

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