The gold price, in terms of U.S. dollars, hit another high today.  It seems that we are living in bizarro world.  It is quite strange that bonds are doing well and gold is doing well.  Bonds go up in value when interest rates go down.  Interest rates represent the price of money.  They also represent risk.  When it comes to buying U.S. government bonds, there is little risk (or at least that is the perception).

Right now, the bond market is saying that there is little threat of future inflation.  Gold is saying otherwise or else it is trying to price in other risk, such as a geopolitical event.  I don’t see this trend continuing for a long time.  Either bonds will fall or gold will fall (or at least not go much higher).  Gold could easily go to $1,300 or $1,400 an ounce.  But for gold to go to $2,000 and higher, it would seem that interest rates would go up significantly.

It is not that higher interest rates cause higher gold prices.  It is just that they tend to be correlated.  You could see gold go up in price and see interest rates follow behind it.  That is why you should have a substantial part of your portfolio (at least 20%) in gold and gold related investments.  You can’t predict when the price might take off.  Gold might be more of a signal for higher interest rates than the other way around.

The bond market and the gold market are in competition right now.  People are looking for safety and some are going to bonds and others are going to gold.  The people going to bonds might win out in the short term.  In the medium term (let’s say 5 years), gold could easily win out.  The bond market doesn’t see inflation as a threat yet, but I think it will eventually.