Gold and the problem of fiat money

 

The US government has consistently tried to marginalize gold, and has all of the focus on the dollar, but that only works if we behave ourselves. If we add a lot of debt on top of a fiat currency, it doesn't work.” - Chris Walen

I have not been a gold bug, nor will I change, but there is a problem with fiat money. Money is a store of vlaue because people believe it is a store of value. It is a matter of trust. The safe asset is a safe asset becasue it is belived to be a place where value is maintained.

The literature on safe assets does note that the safety is a relative concept. If there is too much of the safe asset, there will be a decline in that asset's safety value. When that happens, investors will look for other safe assets. If those other safe assets have a problem of excess supply, there will be a demand for real assets that offer safety and limited supply. 

The increase in gold demand is a response to the excess supply of Treasuries based on the large US budget deficits. The safety of Treasuries is being eroded, so there is a search for alternatives.