In normal times, the price of gold wouldn't be anywhere near the lofty $1,400 (U.S.) an ounce it breached for the first time ever this week.
Consider the barbarous relic's run to once-unthinkable highs as a sign of Act 2 of the world financial crisis. In Act 1, investors learned that many apparently impregnable institutions, such as Lehman Bros., could implode. Now they're learning that many nations and their currencies might be facing a similar crisis of confidence, led by the United States and its dollar, closely followed by Europe and its euro.
Just as investors in the heat of the panic two years ago dumped stock in Lehman and other financial institutions, telegraphing to everyone that the economic system was in deep trouble, the sharp runup in gold could be a sign of something even more ominous. The big rise in the price of gold represents the dumping of government-issued currencies for the perceived safety of the yellow metal.
Hard-core gold bugs have been predicting such a bonfire of the currencies for ages. But a number of more mainstream financial commentators are starting to believe much the same thing.
For one, Fred Hickey, the publisher of the influential High-Tech Strategist newsletter, is so nervous about the possibility of a free-fall in the U.S. dollar that he's stashed half his assets in gold. He frets that Washington is on a path of currency debasement that isn't going to end prettily.
"There are instances upon instances and it's always the same thing," he says. "The economies are weak and the governments think they can pump it up with money printing. We're following that path."
What has got Mr. Hickey and others like him most nervous is that the U.S. Federal Reserve Board announced a $600-billion "quantitative easing" program in early November, the second such effort since the financial crisis began. Essentially, it means creating new money out of thin air by purchasing U.S. treasury bonds.
Bullion has risen about $150 an ounce since late August, when Federal Reserve boss Ben Bernanke first hinted he'd fight the slump by running the printing presses. One or two rounds of quantitative easing probably wouldn't be a big problem, but what if there is round 5, 6 or 7?
And it's not just the U.S. Many countries have been trying to jump-start their economies this way. Japan has been printing money; ditto for the United Kingdom. Even the European Central Bank, often thought of as a bastion of the hard-money crowd, has been buying dubious bonds from basket-case countries like Ireland and Greece.
That is why gold has risen sharply against not only against U.S. dollars but pounds, euros, yen and even Canadian dollars. The Bank of Canada isn't engaged in quantitative easing. But the crisis is making investors suspect all currencies. The loonie is just losing value relative to gold at a slower rate.
"The [U.S.]dollar hasn't taken a really big hit yet. That's the thing to watch for," says John Williams, the economist behind Shadow Government Statistics, a newsletter that analyzes official U.S. financial data to see where government is fudging figures.
What could ultimately take down the dollar?
Mr. Williams worries that the weak U.S. economy will cause the country's deficit to expand, and ultimately investors will become so worried about the solvency of the United States that they will refuse to buy U.S. Treasury securities, just as they're balking about bonds from Greece and Ireland.
If it included the real cost now accumulating of future obligations for social security and Medicare, Mr. Williams says, the U.S. annual deficit would be a gargantuan $4-trillion to $5-trillion, rather than the commonly used figure of around $1.3-trillion. If the Fed had to step in and cover that size of a deficit, it could cause hyperinflation, a quick dollar collapse and absolutely astronomical prices.
"If the dollar is worth nothing, [gold]could be $100-million an ounce in terms of the U.S. dollar," Mr. Williams says, laying out the most apocalyptic scenario. "I mean, you divide by zero, you get very big numbers."
That view may be extreme, but other analysts at least agree gold's bull run still has legs. Recently, Shayne McGuire, a manager with a Texas' teachers pension fund, one of the few big money managers in the U.S. to invest heavily in gold, wrote a book predicting the metal could hit $10,000 an ounce.
But many analysts are skeptical that the dollar is about to implode and gold reach nosebleed levels as a second instalment of the financial crisis.
Although a dollar collapse may happen at some point, "in no way are we yet in a currency crisis," contends Martin Barnes, an analyst at BCA Research, a Montreal-based investment research firm. If we were, he says, the U.S. stock market would be plunging as it did in 2008, and so would U.S. bonds.
And despite its record price in nominal terms, gold is still far below the $2,300 it would have to reach to exceed its 1980 high, taking inflation into account - a sign that things aren't as bad as three decades ago.
But Mr. Hickey doesn't believe the U.S. has the political will to inflict upon itself the painful budget cuts and grinding recession that would be needed to bolster the dollar, rebuild confidence in government finances and shrink the economy's debt burden to a manageable level.
If you accept that alarmist point of view, his advice is that the dollar crisis is in its early days. He says investors should go on dumping dollars for gold. If gold levels off, as markets periodically do, use the dips to load up on more. "This is the most dangerous moment possible for money holders."
Martin Mittelstaedt covers investing for The Globe and Mail.