It isn't rocket surgery. Gold appeals – and thus rises – when the better alternatives don't...

DURING THE 1980s and '90s, when US consumer prices rose at what would have been a record rate of inflation if it hadn't been for the 1970s, the Gold Price fell by three-quarters, writes Adrian Ash at BullionVault.

Peering back at the recent past therefore, analysts and economists all agree:

When looking for a sure-fire "inflation hedge", you surely won't find it in gold.

Thing is, however, US investors and savers didn't need an inflation hedge back in the 1980s and '90s. Not in Gold, at least. Because the better alternatives – productive assets such as real estate and stocks...or the "risk-free" assets of cash, Treasuries and investment-grade bonds – all paid way more than inflation anyway.

Who needs a lump of dumb metal if just holding cash pays 4.5% real returns each year on average, as it did in the '80s?

Why bury your savings in a rare, deeply liquid but unyielding asset when stocks keep rising by one-fifth per year – and paying a 2.4% yield each year on top – as they did in the '90s...?

And why buy and hold anything else when stocks, cash, bonds and property all fail together, as they have so far this century...?

It isn't rocket surgery. In two of the last four decades, people have twice turned to Buying Gold...pushing the price higher...when alternative stores of wealth failed at the task.

Whereas during the two intervening decades, gold wasn't required. Because you don't need an "inflation hedge" if cash-in-the-bank is paying 4.5% per year over and above the race of increase in consumer prices. And nor do you need a "safe haven" when stocks keep rising by 20% per annum.

Whereas today? Decide your outlook for the major alternatives – meaning cash and stocks, but also real estate and, perhaps most critically in our world of record government debt issuance, bonds – and you might just work out whether you need reliably rare, indestructible gold in 2010 and beyond.

Ready to Buy  Gold today...?

This time IS different for gold. Different from how everyone sees it, at least...

EQUITY BULLS are so blind to vanishing yields and over-rich price/earning ratios, they apparently need Robert Prechter to tell them to sell, says Adrian Ash of BullionVault.

Blamed for causing a further 50-point plunge in the Dow on Tuesday – precisely the kind of news-driven move that Prechter's Elliott Wave International says just can't happen – he also told CNBC viewers that gold is "over owned" by investors and over exposed in the media.

Thanks to the "non-confirmation" in silver, in fact, after gold hit a new record high in March 2008 – only to...well...hit a series of new records throughout late 2009 – the metal is now fated to fall.

Gold's real bogey man however, says Prechter, is inflation. Or rather the lack of it. You need to quit everything except "cash and near-cash", in fact, because deflation now looms. Which would be disastrous advice if inflation took hold. But the death of inflation, long forecast by Prechter...and even longer forecast by market historian Roger Bootle here in London...is now upon us, apparently, and will see consumer prices fall, the value of dollars and debt increase, and the ultimate inflation-hedge, Gold Bullion, sink without trace.

Which could come to pass. But it hardly explains the last 10 years, let alone the 20 years before that...

Between August 2008 and Aug. '09, year-on-year inflation in US consumer prices decelerated at its fastest pace in 60 years, dropping by almost eight percentage points to turn negative for the first time since 1949.

Here, if ever you needed it, was deflation in the cost of living (at least on the official CPI measure). The Gold Price, in contrast, rose almost 15% against the US Dollar...gaining more than a fifth vs. the Euro and adding 31% for UK Sterling investors even as their domestic inflation rates sank below zero as well.

A blip? Not quite...

From the fall of 2004 to late-autumn 2009, the cost of living in the United States – as measured by the officially compiled Consumer Price Index – rose by just less than 14% all told.

Yes, the bean-counters drowned the numbers in ice to keep the CPI cool, but that rate was still barely half the 5-year pace averaged during gold's two-decade bear market of 1980-2000. Back then, gold fell from a month-end peak of $666 to $255 an ounce. Yet in the back-half of the Noughties, and with underlying consumer-price inflation little changed from the "Great Moderation" of the late '90s...at pretty much its lowest level since the mid-60s...the Gold Price somehow trebled and more for US investors, as well as for everyone else in the world.

Gold's rise of 2000-2010 didn't quite match the twenty-four-fold gains of the 1970s. But gold's decade-beating bull run to date – longer than ever the US stock market has managed – came against the lowest official US inflation since before Lyndon B.Johnson left the White House.

To repeat: Gold did not get, nor require, out-sized inflation to beat all other asset classes hands down. Yet still it makes news to assert that "Gold is a poor inflation hedge" as Harvard economist Martin Feldstein finally noted this month, peering through the wrong end of his telescope and finding the patently obvious to be awfully small and a long way away.

Gold was no hedge at all against the inflation of the 1980s and early '90s. Whereas it worked wonders against the even angrier price rises of the 1970s, only to beat all other investments again during the muted, near-gentle destruction of money's value so far this century. All of which means that expecting nailed-on inflation protection in gold is not to ask too much, but to ask the wrong question entirely.

And assuming gold must therefore plunge on deflation is wrong like pilchard-flavored ice cream.

Part II to follow...