INTERNATIONAL. Gold prices closed 3% up for the week on speculation the Federal Reserve’s steps to revive the US economy will spur demand for precious metals as a hedge against inflation.

“If there is anybody out there who still does not believe the US is heading for hyperinflation, then their eyes are closed,” James Turk, founder of GoldMoney.com, which had US$608 million in silver and gold in storage for investors at the end of February, told Bloomberg. “Hyperinflation arises when there is no constraint on government spending and central banks turn government debt into currency. That is exactly what the Fed is doing.”

Gold may rise above US$1,000 before the end of the first quarter, Turk said. The metal reached a record US$1,033.90 an ounce on 17 March 2008.

The move announced on Wednesday means the Fed will effectively print money, and has damaged the dollar's reputation as a safe store of value and stoked fears of inflation, sending investors to gold.

“We’ve got a massive increase in the Fed’s balance sheet, and the markets are taking it to be both inflationary and as devaluing the dollar,” said Frank McGhee, the head dealer at Integrated Brokerage Services in Chicago. “This reinforces the potential for hyperinflation, which would drive commodity prices higher.

Spot gold was quoted at $952.60/953.50 an ounce Friday, slightly below its level of US$958.60 late in New York on Thursday but up nearly 3% week-on-week.

Gold futures fell slightly Friday after rallying nearly 8% in the previous session, as a rebounding US dollar reduced the metal's investment appeal.

Gold for April delivery, the most active contract, fell US$2.60, or 0.3%, to end at US$956.20 an ounce on the Comex division of the New York Mercantile Exchange.

Marc Faber the Swiss fund manager and Gloom Boom & Doom publisher said the US risks being hit by hyperinflation as a possible consequence of its loose monetary stance, though he doesn't believe that it is there yet.

"Everyone thinks fiscal and monetary measures will work to fix the financial system," says Faber. "I don't. They will be disastrous and fuel inflation."

"If I look at government debt in the US, and debt in general, I think the only way they will not default physically on their debt is to inflate," Faber said.

The Fed's money-printing looks set to bolster the appeal of hard assets, whose supply can't be boosted quickly: "the supply of oil, gas and copper is relatively limited compared to paper money you can print". And with many governments wanting to lower the value of their currencies, the stage is set for all currencies to lose value against precious metals."

Richcomm Global Services said in a research note there are concerns the Fed move may prompt other central banks to follow suit, creating a domino effect of weakening currencies and sending investors to safer investments such as gold.

"By spending US$300 billion on long-term US Treasuries, US$750 billion on worthless mortgage-backed securities, and US$100 billion on other federal agency debt, the Federal Reserve will be doing nothing more than printing US$1.15 trillion out of thin air, which means Americans are guaranteed to see a sharp decline in the purchasing power of their US Dollars," the National Inflation Association (NIA) said in a statement.

Wednesday's news brings total funds allocated by the Federal Reserve and United States Treasury during the financial crisis up to US$11.4 trillion and although only US$2.8 trillion has so far been spent, we believe the full US$11.4 trillion will inevitably be spent, the NIA said

"We believe inflation would be much higher if it wasn't for all of the temporary factors driving consumer prices down such as the forced liquidations of hedge funds, de-leveraging of banks, going out of business sales of retail stores, etc."

"These temporary factors will soon be gone. They are likely to end at the same time as the Federal Reserve begins printing trillions of Dollars and China potentially becomes a net seller of U.S. Treasuries. The perfect storm is ahead for massive inflation to begin in the second half of 2009. Being that our country already has an US$11 trillion national debt and US$55 trillion in unfunded liabilities for social security, Medicare, and other social programs; hyperinflation during the next decade is becoming less the worst case scenario and more the most likely scenario," the NIA statement added.

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