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Golden Era for Gold? Maybe, Even at

20/11/09. As frothy as gold has been lately, by some measures it has only
just begun to bubble.

Bucking Thursday's broad market selloff, Comex gold futures rose to a
record-high $1,141.40.

Up 62% since last November, gold is enjoying a moment that is either the
start of an amazing bull run or one of those magazine-cover episodes that
precedes a fall.

In recent weeks, everybody from hedge-fund wizard John Paulson to the
central bank of India has made a show of buying gold.

They may be on to something. Gold is still well below its inflation-adjusted
record high, set in January 1980, of $2,290 an ounce.

The tailwinds for gold today are awfully similar to those that pushed it
higher in the leg-warmer era.

Perhaps most important, with central bankers pumping cash into the
financial system, investors are again questioning their ability to handle

In the context of easy money, the sky seems the limit for gold.

If the U.S. dollar were back on the gold standard, notes Société Générale
analyst Dylan Grice, then gold would have to be priced at $7,648 an ounce
in order to fully back all of the dollars in circulation. That calculation is
based on the U.S. monetary base of nearly $2 trillion and U.S. government
gold holdings of 261.5 million ounces.

It seems unlikely that gold could get anywhere near that high anytime

The deflationary forces in the economy are strong.

Much of the $2 trillion in circulation is idling on bank balance sheets,
contributing nothing to inflation. Gold bugs argue bullion holds its value
when inflation falls, but that wasn't so from 1980 to 2001.

Inflation fear isn't the only driver of gold demand, however. Fear that global
policy makers don't have a handle on trade, budget deficits, geopolitical
conflicts, resource shortages and myriad other woes also is boosting gold.

"You are basically short trust in government when you buy gold," says Mr.
Grice, who suggests gold may be in the early stages of a long-lasting
speculative mania. "Gold goes higher until policy makers get ahead of
their problems."

Gold looks increasingly bubbly, but bubbles often inflate more than we
can imagine.