Crigger: Is it just macroeconomic factors that would be pushing this up or is there a supply and demand imbalance here as well?
Foster: It would be investment demand. This is investors in genuine fear for their wealth.
We just saw that the Fed is going to replenish their supply of certain U.S. debt going forward, and they may increase that activity going forward, depending on what the economy does. What it amounts to is printing money. They're devaluing the U.S. currency. When investors see this happening, they look for a sound currency and that's the role that gold plays in this environment. When the leading reserve currency, which is the U.S. dollar, is mismanaged, people look to gold as a safe-haven currency.
Crigger: In this scenario, then, do you see that we'll end up with hyperinflation, deflation or even stagflation in the future?
Foster: Well I think we're going through a period of deflation. We're in the midst of a deflationary credit contraction right now, and I think those dynamics will dominate the market for another year or two.
But once the credit markets start to function normally again and the velocity of money picks up, then I think we have a very real danger of having an inflationary cycle. If it were to get out of hand—if the Fed's policies remain too easy for too long—then we could have a cycle like we saw in the ‘70s, with double-digit inflation.
Crigger: So I'd gather that you don't think the euro-gold trade is over quite yet, either.
Foster: in the near term, with the European situation, they've put a band-aid on it for now. The markets have settled down and they're not as concerned about the euro.
But ultimately, I think the finances of Greece are almost impossible to cure without some sort of restructuring or default. At best, they're just buying time. When that restructuring finally occurs, then I think the markets will be unsettled.
So things have settled down for now, but by no means have we seen the end of it. That's another reason we are bullish in the long-term towards gold. The problems with fiscal and monetary qualities aren't just in the U.S.; they're in Europe and Japan. The major economies of the world are in serious financial straits.
Crigger: We're on the cusp of a seasonal high point for gold, as buyers worldwide start purchasing jewelry for Diwali and Christmas and other holidays. How do you think this will affect prices in the short- to midterm?
Foster: That's why I said earlier that I think the world will trend toward new highs as we move into 2011. If jewelry demand will pick up in the fall, like it usually does, then that will provide a base for gold to build on. Then if you layer in some of these macroeconomic financial stresses that seem to pop up periodically, that will be the catalyst to really drive gold to a new level.
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