Price of gold looking noteworthy

May 14 2009 by Peter Jackson, The Journal

I AM, I can now reveal, a millionaire. In fact, I am a trillionaire, in possession of 300 trillion dollars.

However, before the International Monetary Fund, General Motors or any cash-strapped Members of Parliament start beating a path to my door, I had better point out that the three 100 trillion dollar notes in my possession were issued by The Reserve Bank of Zimbabwe.

They are, of course, worth little more than the paper they are printed on and that's because The Reserve Bank of Zimbabwe has chosen to print so many of them. It's what we call inflation.

Outside Zimbabwe, inflation has not been much of a worry recently, rather fears have all been about deflation and it has been to avoid that that governments, particularly the US government, have been printing money like crazy.

During those times of deflationary fear, the price of gold went up, fulfilling its traditional home as a safe-haven asset in troubled and threatening economic times.

Interestingly, however, as so many observers detect green shoots of recovery, the price of gold is not coming down, but is still sticking above US$900 an ounce, 3% above where it was a year ago. Some analysts are predicting that it will reach US$1,500 an ounce.

There are two possible reasons for this. The first is that investors, or at least those sticking with gold, don't believe the green shoots are the harbingers of anything more significant than the short-lived rallies that punctuated the early stages of the Great Depression. They perhaps doubt that a crisis that took so many years in the making and which was based on such a mountain of debt and such inflated asset values, is going to resolve itself so relatively painlessly.

Second, there are those who believe we may be seeing a recovery, that the US government stimulus of more than US$1 trillion will get the US and then the world economy moving again, but at the price of terrible inflation. And, when inflation soars, so does the price of gold. So, maybe the smart strategy is to move into gold in case prices do start shooting up.

And you could hedge for deflation by buying a few hundred trillion Zimbabwean dollars.

Peter Jackson is a writer and ex-business editor of The Journal – p.jackson77@btinternet.com