THE RISK of inflation associated with accommodative monetary policies is expected to provide support for Gold Investment demand, a key gold market organization said this week.

Central banks, fearful of deflation, resort to further stimulus measures such as quantitative easing which would see the value of currencies eroded, according to the World Gold Council's statistics commentary for the second quarter.

"Deflationary concerns in some countries provide room for further fiscal and monetary stimulus," the WGC says.

"This may lead to a further debasement of currencies through unconventional monetary policy and an increased risk of future inflation. These factors should provide support for future Gold Investment."

Several of the world's major central banks have announced stimulus measures in recent weeks.  The Federal Reserve last month extended its so-called Operation Twist, aimed at lowering longer-term interest rates. The Bank of England has added a further £50 billion to its quantitative easing program, taking the total to £375 billion. The People's Bank of China meantime has twice cut interest rates, while earlier this month the European Central cut its main policy rate to a new record low.

"These accommodative measures should fuel the risk of consumer price inflation further down the line while providing a temporary boost both to asset prices and capital flows to emerging markets," says the WGC.

"Further, the apparent dependency on central bank support for an ailing global economy highlights its chronic weakness. The combined weight of uncertainty and hope of central bank action will maintain higher asset price volatility."

Gold Investment could benefit investors "in various economic scenarios, not only during high inflation periods" the commentary says. Analysis by research firm Oxford Economics last year (available to download)"showed that gold would outperform equities and housing in a deflationary scenario".

"While inflationary pressures may be receding in various regions, there are underlying trends to suggest that deflation risk has increased," the WGC says.

"This challenging environment tends to be conducive to Gold Investment...the scope for further quantitative easing and fiscal support will raise future inflationary risks but might also catalyze global growth – painting a backdrop that is typically supportive of gold demand."

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