Gold, Confidence and Liquidity

Steve Saville:

"The current gold bull market, like the gold bull markets that came before it, is about falling confidence in the currency of the realm, which is, in turn, linked to falling confidence in central banks and governments (the purveyors of the official currency).

...Over the past year the gold price has not been driven higher by a general decline in confidence, but, instead, by a rising sea of liquidity that has also pushed many other prices upward. At least, this is our view and it is a view that is consistent with a) gold's poor performance relative to most industrial metals, b) the substantial narrowing of credit and yield spreads, and c) the concurrent sharp rises in the prices of investments that normally aren't positively correlated.

...Because gold has been a beneficiary of the rising sea of liquidity over the past year it will almost certainly be hurt once liquidity starts evaporating, but any downturn in the gold market associated with declining liquidity is likely to be much less in terms of both duration and magnitude than the corresponding downturns in industrial metals, emerging market equities, and other markets that were the more natural beneficiaries of the rising liquidity."

To what extent will the issuers of fiat money go to maintain the required level of confidence? Consider, for example, Tim Iacano's article in which he asserts that Bernanke can save the US dollar or the US housing market - but not both.

You can read more about Saville's view about the relevance of confidence in paper money to gold here.