Gold prices are one of the most revealing economic sygnals that exist. When gold prices shoot up, it’s because investors are afraid of inflation, monetary unraveling, or financial collapse. They’re rushing into a “worst case scenario” asset.
The fact that gold prices have been increasing steadily for the last decade tells you a lot about how investors have become more and more concerned about the underlying fundamental problems of the dollar and the US government — not to mention the governments of Europe and the rest of the world.
Gold Prices and Inflation Fears
Gold doesn’t necessarily go up directly because of inflation in the short run — it goes up directly because of inflation fears in the short run.
Remember, prices are dictated by supply and demand — which is in turn dictated by investors. It’s not like some automatic law of physics — it’s about investors making personal decisions.
That’s why gold prices often go up faster than inflation — because of fear of future inflation.
Gold Prices and Collapse Fears
Along the same line, gold prices go up the more afraid we become of an actual systemic collapse. The reason for this is pretty simple — worst case scenario, you have the basic asset you can trade for other stuff later on.
It’s about doomsday, so plenty of politically correct investors laugh it off. I think that’s a grave, silly mistake.
Gold Prices and You
If you’re a market timer, then investing in gold is all about predicting the future emotions and feelings of the system. If this was 2008, and you believed things were not going to be fixed by short-term bailouts, then you should have bought plenty of more gold.
If you believe the European debt bomb is going to explode, then you should probably buy more gold now.
There could, of course, be some sort of unexpected development in gold markets that makes the price completely crash even while fear goes up — but that’s true for every investment. That’s a case for diversifying, not for ignoring certain investments.
Over the next few weeks, I’ll be writing more about gold prices and gold markets than ever before, because now that we finished the gold investing course, I’ll have time to focus on markets rather than strategy.
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