To my understanding the people in the business that are predicting that the price of gold will come back to around USD $1,100 mark in the long run are those with price estimation models designed to provide estimates to people that are in the business of making long term investment decisions, including those providing feasibility studies for projects.
As it is the case with every model its usefulness lies in the accuracy of its assumptions including the one about gold having lost its value as a traditional harbinger of inflation, a fact that may be understood as temporary anomaly. It certainly is possible for gold to stay on a world of its own almost ad infinitum, but if one has to make a 300 million dollars decision about building a new mine I certainly would be feeling very uncomfortable if management were heavily relying on such possibility.
Now allow me, if I may, to go through some of your comments.
"Though there have been Sovereign crises in the past never before we had so many countries with a potential to default at the same time, along with the ability to bring down other countries Central banks due to huge interconnectedness between them."
First, any country that borrows money, specially when that borrowing is in a foreign denominated currency has the potential to default on its obligations, a circumstance that has lead the markets to apply different risk premium rates. And that is what to a certain extent is making the debt problems in Europe hard to solve.
If you look at the rate for Italian 10 yrs bonds you will see that the markets on the 3th of August were asking 6.14 percent while the rate for Japanese 10 yrs bonds were at something like 1.07% and this in spite of Japan having a much higher level of debt relative to GDP than Italy.
If you ask why is that, the reason is because Italy cannot print euros while Japan can print yens, and because Italy cannot print euros any haircut, if one as to come, will come as a single large blow instead of multiple little blows at indeterminable rates.
But that is not the end of the story. With bond rates at 3% Italy would be able to service its debt without any problems and because of that it is why the ECB was forced to intervene buying Italian bonds. When central banks buy bonds their price goes up and their yield down. This is exactly what the FED was attempting to do when engaged in QE2. It was trying to bring short term interest rates down. Since treasuries are considered risk free, their rates represent the time value of money (a dollar today has an higher value than one tomorrow, next month or year) and what the Fed was attempting was to remove that time value out of the interest rate component so that only risk premium would remind. http://www.investopedia.com/terms/t/timevalueofmoney.asp#axzz1WwozeOuk
To say that "A good chunk of QE2 was used to bailout Euro countries via IMF" requires quite a bit of imagination.
Second, when a central bank lends to another, and they do, it usually gets foreign currency as collateral and not Greek bonds or something similar. Second, unless a central bank is precluded from printing money it will never go down. Their promise to pay the bear can always be realized by giving the bear a freshly minted promise to pay the bear, and so on ad infinitum and if the central bank is constrained from printing money then, most likely, it would be baked by Treasury. If the Greeks default then the bonds will be sent back to the banks in Greece that gave them to the ECB as collateral and if Greek banks in turn default then the treasuries of Germany, France, etc will have to cover the loss. However to my understanding the Europeans still have the ESF with the ability to either take the Greece bonds from the hands of the ECB or lend money to Greece when the payments fall due.
I better close now as this post is already too long.
FML Price at posting:
6.8¢ Sentiment: Hold Disclosure: Held
(20min delay)