Though the price of gold has risen for 12 consecutive years, there are a number of potential catalysts that can drive gold prices much higher, such as expanding government debts, currency wars and bank holidays.
Expanding Government Debts
Western nations, including the United States, experienced spectacular growth following World War II, and much of the growth was fueled by credit expansion. So long as economic growth rates remained above a threshold over extended periods of time, debts could be sustained or tolerated. In particular, the real estate boom before 2008 gave many Western nations a false sense of permanent prosperity. Governments thus spent beyond their means, and assumed that continued growth, fueled by the real estate market, would bring in tax revenues to offset the spending. However, when the real estate markets crashed, many nations were left with high debts and diminishing tax revenues. As a result, interest rates in many parts of Europe skyrocketed higher, forcing the European Central Bank (ECB) to print money to maintain the value of sovereign bonds and lower interest rates, making the debts more manageable. Similarly, the Federal Reserve has printed massive amounts of money in the United States to boost the value of Treasury bonds and artificially lower interest rates. The long-term result of central bank money-printing has been to boost the price of gold, since it is a hedge to inflation with a price that moves inversely to it.
Currently, the world is experiencing currency wars, in which many nations, Western and non-Western, are purposely devaluing their currencies in order to make their exports more competitive by cheapening them, as well as to encourage more consumer spending and inflate away their debts. Though exports may be boosted temporarily from devaluing a currency, a byproduct of it is that inflation rises for consumers using that currency, particularly for items that are imported. Currency wars also risk creating hyperinflation, which results from a loss of confidence in a currency, causing extremely high inflation in a short period of time. Whether there is high inflation or hyperinflation as a result of the global currency wars, gold prices will move higher, since investors will purchase gold to protect their wealth.
Recently, as a result of bank insolvencies in Cyprus, a member of the European Union, there was a bank holiday and a confiscation of deposits over 100,000 euros. Bank holidays occur when a government forces banks to shut down to prevent bank runs or capital flight. Though it is claimed by European officials that what happened in Cyprus will not be a template for future bank crises, legislation is currently being considered in the European Union to allow for the confiscation of deposits to prevent bank insolvencies.
A long-term effect of the bank holiday in Cyprus is to cause investors to lose confidence in the banking system within the European Union. As a result, investors increasingly will consider purchasing gold and other assets that they can keep outside of the banking system. Wealthy investors in other parts of the world, including the United States, will also consider purchasing gold, since it cannot be confiscated as easily in case of future bank failures.
With global economic instability increasing as a result of growing sovereign debts, currency wars and potential bank holidays, demand for gold, a safe haven asset, will increase. As a result, gold prices may move significantly higher, despite 12 consecutive years of gains.