Analysis: Gold price an inflation alarm

Hang on to your hat and watch your savings because if last night's sharp rise in the price of gold is an accurate guide, a long-predicted wall of inflation is about to break over the world.

The increase of $US20 an ounce took gold back above $US1360 an ounce with the futures price in New York closing at $US1364/oz, a three week high.

Chinese gold buying and a stunning reversal of policy by a leading U.S. bank in how it views gold were two of the reasons cited for the price rebound after two months in the sin bin.

But, the reasons behind movement in the gold price are secondary to what it is telling us about the future and how it will affect everything from asset values to shopping habits and bank lending.

Inflation, at a rate not seen for decades, is emerging as the major economic factor in countries which have over-stimulated their economies by resorting to excess printing of paper money.

If inflation takes hold it changes the way an economy functions and consumers behave. The most simple examples of high inflation rates is that an urgency develops to buy now before prices rise, while mortgage holders who have not locked in a fixed rate suddenly find their repayments soaring as interest rates rise.

China is an early example of what's happening, with gold the yardstick of a changing mindset.

Bank deposits in China for average savers currently pay around 2.7% for short-term deposits. But, after allowing for China's official inflation rate of 4.6% that means the real interest rate is negative and rather than make money by saving you lose money.

It is probably a lot worse than the 1.9% rate of loss in that example because the true inflation rate in China is believed to be much higher than what the government says it is.

So, rather than confront a shrinking cash balance in the bank Chinese savers are turning to a commodity which has served them well for a few thousand years, gold.

Last year, China imported 209 tonnes of gold, a dramatic increase on the 45 tonnes imported in 2009 with the bulk of its being acquired by private investors.

This flight back to gold is being repeated around the world as people with money realise that the massive amounts of stimulus spending (cranking up the printing press) after the global financial crisis has left the world awash with U.S. dollars, euros, pounds, yen and yuan - the foodstuff of inflation.

Even moves by Chinese banking authorities to raise interest rates has not calmed inflation jittery investors and savers who see a tightening monetary policy as confirmation that the inflation genie is escaping from its bottle.

Interest in gold as an alternative form of investment has been further boosted in the U.S. where the investment bank, J.P. Morgan, has changed its rules to formerly acknowledge gold as being the equal to government bonds and other blue-chip assets as security.

What Morgan has done is allow clients to deposit gold they own in return for a loan to invest elsewhere, a change which financial observers have interpreted as the bank acknowledging the status of gold as a form of currency to match triple-A rate treasury bonds.

A spokesman for Morgan acknowledged in this one sentence statement the dual roles of gold as (a) an inflation hedge and (b) an asset as valuable (or more so) than government-issued paper money.

"Many clients are holding gold on their balance sheets as an inflation hedge and are looking to make those assets work for them as collateral," the Morgan spokesman told the Wall Street Journal.

Gold, in its pure metallic form such as a bar, does not generate income. But it also evades the corrosive effects of inflation on most other assets.

That's why gold is staging its current price revival, and while the price itself is interesting the important role of gold today is as an early warning indicator of inflation to come.