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Gold may test new highs on inflation fears

By George Appleshaw

LONDON, December 18, 2008 - Gold looks set for a big comeback due to worries over an eventual resurgence of inflation following this week's chunky cut in U.S. interest rates and the recent $700 billion financial rescue bailout plan.
 
The yellow metal could surge above $1,000 an ounce again as the dollar weakens further. Spot gold hit an all-time high of $1,030.80 an ounce on March 17. It fell back as investors sold holdings to cover losses in other markets. Now gold is around $850 an ounce.
 
While deflation is the preoccupation of many people right now, as interest rates drift close to zero, the big problem facing the world economy later could well be inflation, which is likely to emerge as the dollar depreciates.
 
Inflation will help governments erode their soaring levels of debt. Gold may serve as an ideal protection from rising prices as cash and paper assets lose their value. Holders of alternative currencies to the dollar will find dollar-denominated gold cheaper.
 
Investors are struggling to find any assets that will hold their value. Housing markets and equities may fall further, and commodities have lost ground due to the gloomy economic outlook and prospects for destruction of demand for raw materials. Even diamond prices are softening -- except for the rarest and most magnificent gemstones.
 
So gold is gaining its allure once again. A rally may be just around the corner.


The opinions in this article are those of the author.