So if the booming gold price says anything important about the future, it isn't simply proof that inflation is about to skyrocket. There are lots of things keeping inflation low, as well. (Bijal Shah, global strategist at investment firm Icap in London, thinks U.S. inflation may be as low as 1% late next year). And even if gold works over the very long term as a hedge against inflation, be aware that long term may be too long for you, the individual investor, anyway. Gold prices can fall for years, even decades, in real terms. Someone who bought it near the last peak, in 1979-1980, saw most of their purchasing power erode over the next 20 years. In practical terms gold was a disastrous investment.

Peter Bernstein, the legendary investor and financial writer who died earlier this year, observed casually in his classic 2000 book "The Power of Gold" that "the purchasing power of gold in terms of goods and services was many times greater in the Middle Ages than it is today." Since publication, of course, prices have roughly quadrupled. However, in real terms, even today it has only just recovered the ground lost from typical levels seen 30 years ago, and it remains far below its momentary 1980 peak of $850. (In today's dollars that would be about $2,200 an ounce)

If gold really is effective as an inflation protection, that may apply most to institutions with very long memories indeed -- like central banks, university endowments, and wronged first wives. Maybe gold is the next mania. If so, there is still a lot of money to be made speculating.

Remember you make the most money in a bubble right at the end, and usually on the silliest stocks. A gold mania probably won't burst until we see, say, "GoldontheMoon.com" raise $20 billion in a heavily-oversubscribed IPO. But betting on a bubble is a very different thing from relying on a "safe haven" from inflation."

The white-hot speculation engendered by such apophenia (the phenomenon of seeing things that aren't there, or the experience of seeing patterns or connections in random or meaningless data) is also drawing some attention in circles where the speculators are hoping no one will notice. Like the circle that makes up the Fed. Jawboning from the US central bank has turned...interesting of late. While the Fed's take on matters appears to be more of acknowledgement than a shot across the bow of the speculator's boat, Bloomberg reports that: "Federal Reserve officials said record-low interest rates might fuel “excessive” speculation in financial markets and possibly dislodge expectations for low inflation, according to minutes of their meeting released on Wednesday].

“Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period,” minutes of the Nov. 3-4 meeting said, “including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an un-anchoring of inflation expectations.” While policy makers agreed that the chances of such effects were “relatively low, they would remain alert to these risks,” the minutes showed.

Gold prices touched an all-time high of $1,174 an ounce in New York yesterday as a slumping dollar boosted the appeal of alternative assets. The Standard & Poor’s 500 index has jumped 63 percent since its 2009 low on March 9, and the U.S. auctioned $44 billion of two-year debt yesterday at a yield of 0.802 percent, the lowest ever. Financial officials in Japan and China, Asia’s two largest economies, said last week that the Fed’s interest-rate policy risks spurring speculative capital that may inflate asset prices and derail the global economic recovery.

“Participants noted that the recent fall in the foreign exchange value of the dollar had been orderly and appeared to reflect an unwinding of safe-haven demand in light of the recovery in financial market conditions this year,” the minutes said. “Any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching.”

In so many words, the central bankers quoted above, delivered a milder version of Prof. Nouriel Roubini's presentation earlier this month, at the Inside Commodities Conference at the NYSE. The trend, in other words, may not at all be your friend, as far as this brand of asset class speculation is concerned. Why, it cold even bring about "asset liquidation part II" if it keeps up and bids dry up eventually. That, when -and not if- the Fed changes course.

Jon Nadler is Senior Analyst, Kitco Bullion Dealers Montreal

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