EclectEcon

The price of gold rose from about $650/ounce to nearly $900/ounce over the past few months and is still in the mid 800s. Why?

In the past, when the price of gold has raced upward, it has been because speculators were concerned about leaving their financial assets in any form that was denominated in currency, particularly US dollars. Whether they feared global political unrest, or they expected rampant US (and other) inflation, they took refuge in gold and waited out the storm. They earned no interest income on gold, but they expected greater capital gains (or smaller capital losses) from holding gold than from holding other assets.

In those instances (e.g., the late 1970s, early 1980s), speculators drove up the price of gold, expecting it to continue to rise, driven higher by a rising US rate of inflation. Once the US (and world) rate of inflation slowed down, gold no longer served as a hedge against rising inflation rates, and the price of gold plummeted from up around $900 to down under $400 in a comparatively short time.

Is that what is happening now? Are speculators expecting a rising rate of inflation against which they are trying to hedge by buying gold? If so, I have some more questions:

1. If gold speculators are expecting rising inflation rates, will the Bush fiscal policy package plus the US Fed's easing up on the money supply confirm those expectations?
2. At the same time, if gold speculators are expecting rising inflation rates, why are nominal interest rates not rising via the Fisher Effect (named for its discoverer, Professor Effect), as pointed out by James Hamilton?
3. At the same time, if the US gubmnt fears a serious recession and is stimulating the smack out of the economy, what does that say about the US short-run and long-run Phillips Curves?
4. If the US gubmnt is expecting a recession, and if the speculators are expecting rising inflation rates, has the US short-run Phillips Curve shifted upward and to the right? If so, what could possibly have caused the shift? I don't know of any rising in the US social safety net that might cause the Phillips Curves to shift to the right, and does everyone else (beyond the gold buyers) have such rising inflationary expectations that the short-run Phillips Curve has shifted upward? That seems implausible to me.
5. So if there's no overwhelming reason for the Phillips Curves to have shifted, then to expect both rising unemployment rates and rising rates of inflation would have to be incorrect.

So why has the price of gold risen so much if so many people are expecting a recession that will spread to the rest of the world?

For more on inflation and the price of gold, see this in the Telegraph.