Gold in itself is a relatively smaller market, and say if the market starts to have doubts that Obama will not be able to halve the US deficit by the end of his first term, investors may start to shift their reserves into gold. So let's expand this exponetially to say China or the Middle Eastern states start to do the same with their reserves, we will certainly see new levels of gold prices.
Hence a bet on gold is essentially a bet against all paper currencies and against all central banks, and that seems to be a bet put on by several hedge funds including Paulson's now.
If the Fed is forced to debase the USD because of increasing prospects of deflation or inflation, UBS's forecast of $2500 per ounce gold prices, may not look impossible..
Eric Tan, London
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