colin twiggs sums it up

What All This Means

I guess most of us know the issues but this does sum it up well:

http://www.incrediblecharts.com/tradingdiary/2009-03-17_gold_crude.php

"Gold is rising despite a strong dollar because the investing public are looking for safety — buying both the dollar and gold in their need for security. Crude oil, silver and platinum, however, warn us that something may be amiss. With the collapse of the global debt bubble, we face an extended period of deflation. And while gold is a great inflation hedge, it is a pretty lousy investment during a deflation.

There is an alternative scenario, however, which is driving the current divergence. If the (US) federal government pulls the inflation lever, gold prices will soar. Inflation is a tempting solution, especially with massive federal debt, enormous contingent liabilities, collapsing housing prices, and a banking sector on life support. The easy way out may be hard to resist. With liabilities denominated in your own currency, it is a simple matter to give your creditors a "haircut". Double the money supply and your debts are halved in real terms, house prices miraculously recover and bank collateral will rise from the dead. There is just one catch, however. Hyper-inflation. And inevitable collapse of the already-creaking fiat monetary system.

But that would not be bad news for everyone. If the Fed added a few zeros to their dollar bills, gold bugs would be cheering from the sidelines.

In short, gold is likely to decline as long as we experience deflation, but would quickly reverse in the event that the US starts to "print" money (ie. monetize its debt). That would most likely be flagged by a falling dollar."