BORIS SCHLOSSBERG<br />DIRECTOR OF CURRNCY RESEARCH, GFT<br /><br />GOLD has been rallying since 2 November, when it broke through the resistance level of $1,050 per ounce and has continued to make daily record highs. But as its price continues to increase in dollar terms, the metal is encountering a rising chorus of sceptics who see it as merely another asset bubble ready to burst. While the precious metal may be vulnerable to a near-term pullback to consolidate its latest gains, I believe the long-term case for gold remains bullish.<br /><br />Contrary to the popular perception, gold is not a hedge against inflation. Most investors think this because when gold experienced a secular bull market in the late Seventies and early Eighties, US price levels rose at double-digit annual rates. However, gold&rsquo;s actual correlation with inflation is relatively weak. Indeed, in today&rsquo;s economic environment, price levels in G10 countries are at multi-decade lows and deflation &ndash; not inflation &ndash; is a greater concern. But gold continues to rise.<br /><br />So what is the real reason behind gold&rsquo;s rally? As its many critics point out, aside from wedding demand from India, gold is now a near-useless commodity, with its industrial uses replaced by better, more efficient substitutes. But it nonetheless remains a strong psychological store of value and it is the one asset that investors use when they want to express a vote of no confidence in the fiscal policies of the state.<br /><br />Advanced industrialised nations are under pressure to keep spending policies in place to assure the sustainability of the recovery. But in an atmosphere of extraordinarily high unemployment rates, politicians will find it exceedingly difficult to raise taxes next year as they face the full wrath of voters who are already pinched by stagnant wages and high debt burdens.<br /><br />Investors are clearly sensing that this dynamic shows no signs of improvement and it is this realisation that has been the primary catalyst behind the rally in gold. As G10 governments face a protracted period of financial turbulence in the years ahead, the yellow metal&rsquo;s appeal grows stronger every day.<br /><br />Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at or e-mail them at<!--EndFragment-->