genuine qu - why bearish on gold?, page-9

Gold will permanently decline below current levels (~$1750) if:

Supply side
- If a dozen or more 20/30/50m ounce discoveries occur over a couple of years.

Demand side
- US & EU governments default on their debts - and enforce, say, a 60-90% haircut on all EU or US$ denominated govt. bonds.
- China and India contracting would have an impact on jewellery demand and a somewhat negative effect on the gold price.
- IMF coming to an agreement with all member central banks that they will adopt a zero gold reserve holdings policy.
- The emergence of a viable alternative to gold as a store of wealth - say currencies backed by hard assets other than gold.

The odds of any of these events ocurring is extremely low, imo.

The Fed is carrying out QE because it has to. The alternative is to allow the free market to exert its force to cleanse the system (short & Very sharp recession) - but this is not politically or socially palatable outcome.

The argument gold bears use (other than it's gone up a lot, so must fall) is that there's no inflation, and therefore there is no case for holding gold. They are right to a minor extent - there has as of yet been no breakout of strongly rising inflation - but that's no to say that it will not happen, or that the ground work's not being laid for it to occur.

Inflation (as measured by rising prices) requires
i) increasing money supply
ii) increasing turnover of money
iii) the efficiency of the supply of goods & services growing at a slower pace than i) and ii)

We've had i) in spades...and it just keeps increasing with the Fed now committed to carrying out limitless QE.
iii) three is pretty much assured, with Chinese surplus labour now coming to an end, and China already having had an impact in all key consumer product categories
ii) is the missing link...but for how long?

Here's a chart of the velocity (turnover of money). Will it keep declining, or turn up at some point? I have my own ideas about this...but understand that if the velocity of money ever does turn up, it's game over for the US$, imo.

http://upload.wikimedia.org/wikipedia/commons/6/69/Velocity_of_MZM_Money_Stock_in_the_US.png

That'll be when the mainstream money starts entering gold, and when the early money will be planning its exit..