Unlike paper money, gold is finite. So its value can’t be undermined by a rapid increase in supply, making it a useful hedge against fiat currencies that would be debased if inflation takes off over the next few years. And that’s a distinct possibility, warns Dylan Grice of Société Générale. Most developed-world governments face eye-watering public debt loads. Those arose not simply as a result of the financial crisis, but because of ever-rising pension and health-care costs, for which no money has been set aside. Add these unfunded liabilities to the pile and France and America’s public debt, for instance, rockets above 500% of GDP (versus less than 100% for the official figures).
Sadly, tackling this mess is politically unpalatable. According to the Bank for International Settlements, Britain, Ireland and America would need to undergo nasty annual fiscal contractions of 8%-12% over the next five years merely to stabilise overall public debt at 2007 levels. So, as history also shows, the temptation to reduce the real burden of debt through inflation looms large. “Inflationary crises” ranging from ancient Rome to revolutionary France and America were caused by overleveraged governments resorting to printing money, says Grice. Until governments face up to their problems – they will probably be forced to do so when the markets stop lending them money – “the temptation to inflate” will endure. So “the outlook will remain favourable for gold”.