Zeev...
While I agree that a return to a gold standard is neither feasible nor desirable, I disagree with your arguments against gold as an investment and think you have oversimplified a very complex subject. I think your argument breaks down most in your assumption that the supply/demand trends will remain the same - an assumption for which I see no basis.
The demand for gold as an industrial/consumer commodity will fluctuate with the economy - there is little realistic probability on the horizon that any new uses for gold will be found. Industrial demand will rise to some extent when the economy is good and fall when it is bad. The same is true for consumer demand for jewelry and similar items. By far the largest variable in the potential demand for gold is as an investment or as a storehouse of value and that demand has been extremely low because of the long period of economic prosperity and stability in the primary economies of the world.
Since governments have abandoned gold in favor of fiat money as their monetary standard, Central Banks have been slowly unloading their hoards of gold into the market so they can replace it with various currencies for trading and investment purposes to garner a larger return than the lending of gold normally brings in. In so doing, they also hold the price of gold down which prevents it from being seen as a good investment or an attractive alternative to fiat money. But this trend should be seen in context of being a relatively recent phenomena (the US did not abandon gold completely until 1971), and there is no guarantee that it will continue.
The only basis of value in either gold or fiat money is confidence - each is worth only what they are perceived to be worth at the moment by those engaged in commerce. During good times such as we have been blessed with for some time now, fiat money can be just as strong or stronger than gold based on confidence in the economy and underlying strength of the issuing nation - it is easily portable, easy to do business with, and readily accepted by all. Gold, on the other hand, is not very portable, difficult to work with, and expensive to own and store.
Nevertheless, the fact that gold rather than a fiat currency, has been a storehouse of value and the ultimate currency for most of man's history tells us that events can occur that drastically change the demand/supply equation for gold as opposed to fiat currencies. Obviously, the collapse or serious impairment of the issuing nation is one such event, but there are other events that can be just as devastating to fiat currencies and to whatever extent confidence in the fiat currency is eroded the demand for gold rises.
Deflation or even economic depression does not necessarily damage fiat money - Britain came off the gold standard in the early 20's if I remember correctly and came through the Great Depression, although demand for gold was also greater during that time - but it is inflation and political instability that historically caused the ultimate demise of most fiat currencies. Inflation itself is often an imbalance in supply and demand for fiat currency - there is more money being printed than needed (what we are now intentionally doing) and that lowers the confidence in (and thus the value of) the currency.
Many other things can cause the same loss of confidence and value, and we currently have most of those elements in place - an untenable balance of payments, unrestrained printing of new money, rapidly rising government debt, an enormous current accounts deficit, a national policy for devaluation of the currency, a loss of confidence in the economy, and the combination of global instability and the threat of terrorism. All of these can ignite a lack of confidence in the fiat currency and to the extent that occurs, the demand for gold will rise. If any fears arise about a systemic problem in the economy (a rise in domestic terrorism or a derivatives implosion that damages the financial sector, for instance) the demand for gold would soar.
As long as things go well for our nation (and globally), you are probably correct to assume no significant rise in the demand for gold. That will not necessarily be the case, though, and as grounds for nervousness and fear rise and confidence in the dollar erodes, the demand for gold will likely increase. Should such fear spread to the general public, the demand for gold could expand exponentially. Hopefully that will not happen, but it could.
Just my take on it.
mlsoft
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