In general, low-interest rates are advantageous for gold and virtually all investments. The reasoning is straightforward. Gold needs to move up a guaranteed $100 over the course of a year to yield as much as the risk-free alternative, such as depositing money or investing in T-bills, if the interest rate is 10% and gold is trading at $1,000. Since no free market can guarantee a profit, the expectation must be for a much bigger move. On the other hand, investment becomes more appealing if the interest rate is only one percent, especially if real interest rates are negative. In the recent environment, the widespread availability of interest rates that were not even close to zero would have piqued the interest of many investors and prompted them to investigate alternative vehicles, many of which would have included gold.
The world seemed to be blessed with the "Goldilocks scenario" of global economic growth and gold price stability in the 1990s. It was evident that the staff at the central bank were doing an excellent job. Because the monetary authorities would simply raise rates to contain the issue and ensure that the economic nirvana was not significantly disrupted, expansion was not considered a threat. This is the point at which the picture dramatically diverges from the previous nominal high of gold, where inflation had been widespread.
The terms "credit crunch" and "subprime crisis" did not become commonplace until August 2007. Mervyn King, the governor of the Bank of England, initially talked about the "moral hazard" of bailing out institutions whose own policies were to blame for the difficulties they were in now. However, there was little hesitation elsewhere, and the image of "Ben Bernanke's helicopter" became a popular one—think cartoons of the chairman of the Federal Reserve dropping enormous sums of money on a population that was grateful.
The diverse mandates in various nations also contributed to this divergence. While some central banks are tasked with merely controlling inflation, others are responsible for ensuring the economy's health as a whole. For the first group, the situation appeared to be fairly straightforward: It was a compromise between inflation and the recession. In order to prevent a crash in the housing market and to try to avoid the knock-on effects, which were considered to be significantly more damaging to the nation than influence, the policy was to rapidly reduce rates. In addition, as was mentioned earlier, inflation is thought to be containable, whereas deflation is not. The governments of the latter group looked at other ways to keep the economy afloat because they were somewhat more constrained.
However, it appeared to many that the monetary authorities were no longer omnipotent, regardless of the justification. They were, in fact, as involved as the rest of us in events over which they had little or no control.
This chaos resulted in two things. First, for the first time in a long time, inflation became a real concern in the major Western economies, most notably the United States. Second, there was significantly less confidence in the system and the authorities' ability to control events.
The final factor in the rise of gold is the environment.
