They keep telling us that the recession is over so maybe now's the time to start worrying about inflation. That's the view many wealthy investors are already taking, reasoning that a little bit of the yellow shiny stuff will provide some comfort as we start piling our cash into wheelbarrows to do the weekly groceries shop.

It is gold exchange traded commodities (ETCs) that have seen the biggest investor inflows this year so perhaps it's not surprising that the gold price broke through $1,000 an ounce this week.

"Investors are concerned about sovereign risk, quantitative easing, government deficits and the outlook for the US dollar," said Nicholas Brooks, head of research and investment strategy at ETF Securities, at a Dow Jones Indexes commodities briefing on Tuesday. "They are using gold as an insurance policy."

Physically-backed gold ETC holdings are now 8 million ounces, up 33 percent versus end-2008 levels, he said. Gold inflows have been relatively steady, even when the price has corrected, with the biggest flows coming not when Lehman went bust, but when the scale of US quantitative easing and the fiscal cost of the financial bailout became apparent. This supports the view that gold is being used as a hedge against sovereign and inflation risk, Brooks said.

Billionaire hedge fund manager John Paulson has been building up a large exposure to gold this year, seemingly as part of an inflation hedge.

John Reade, head of markets strategy at UBS Investment Bank, also confirmed that UBS clients were showing an interest in assets that would provide inflation protection. "You don't need high inflation for gold to perform well - you only need an increase in the number of people who expect inflation to rise."

Over the last 30 years the returns from gold have been reasonable but not great, with high volatility, he said. But in an environment where the US dollar is weakening, the Fed Funds rate is rising and inflation is rising, gold can be expected to perform, with returns of over 40 percent per annum if CPI increases. This suggests that an investor's tactical allocation to gold should rise in the coming months, Reade said.

He forecast an average gold price of $1,050 an ounce for 2010, pointing out that gold remains very lightly owned by most institutional investors. This was not consistent with inflationary or US dollar weakness scenarios, he said.

Another food price spike could be on the horizon, analysts told Reuters. 
 
Consider these factors:
* Grain prices, led by soybeans, have been up since March. 
* South America’s crop is expected to be a disappointment. Crops in both Brazil and Argentina have a poor outlook. In fact, the U.S. Agriculture Department steadily lowered its forecast for Argentina’s soybean crop throughout the year.

* Many will be looking to the United States to come through with a big crop. But U.S. soybean stocks began the 2009/10 marketing year at a five year low. That means there’s not a lot of surplus to keep prices level if there’s any type of disruption in supply or weather calamity.

Signs of an economic recovery, which are just now beginning to be realized, would be threatened if the world were to face soaring food prices reminiscent of last year. 
 
“It would not be what the financial media is describing today as a green shoot,” said Rich Feltes, senior vice president at MF Global Research. “It’s going to be a green shoot that’s being killed with Roundup Ready herbicide. It’s not going to be good.”

For more information on food price worries, click here.

The recent spate of shark attacks on Australian beaches could mark a turning point in global deflation and signal a change in fortunes for some beleaguered emerging economies, if Nomura strategist Sean Darby is to be believed.

Speaking at a Nomura investors forum, Darby said a chance sighting of a shark on Sydney's famed Bondi Beach three weeks ago made him realise that prices of grain and other soft commodities -- punished of late by global recession fears -- could be due for a rebound.

"I actually saw a shark on Bondi Beach and that made me wonder about the impact of La Nina and how there's a severe drought around the world at a time when many farmers are finding it hard to access credit," said the Hong Kong-based analyst.

The La Nina meteorological phenomenon has been blamed for bringing deep ocean creatures -- such as sharks -- closer to shore and also for a long-running drought that has hit farmers in Australia, China and North America.

Persistent drought could push food prices higher, potentially benefitting soft commodity-producing economies from Vietnam to Ukraine, Darby said.

"This is one area that could disrupt the picture of global deflation that bond markets have," he said.

The correlation between oil prices and the dollar seen since the third quarter of 2007 has weakened. Investors had sold the dollar as U.S. economic prospects dimmed and bought oil as a hedge against inflation and uncertainties in the supply of raw materials. The relationship eased late last year as fundamental pressure from slumping demand and the slowdown of the overall economy pushed oil lower independent of the actions of the dollar, and analysts said the link might not return in the near term.

Gold’s oil-buying power is at its lowest in three years. (The chart shows the price of oil rising relative to the price of gold.) Hedge funds and other traders who play the gold/oil spread could be taking profits. Otherwise, this is hard to explain, since gold is considered a leading indicator of inflation.

In the past two weeks, crude oil prices rose to a record near $120 a barrel, while the spot price of gold fell from around $950 to $870 an ounce. Today an ounce of gold buys 7.65 barrels of oil. When gold was near $1,000 an ounce earlier this year, an ounce bought more than 10 barrels of oil. Gold’s weakest point relative to oil was in 2005 around 6 barrels.

Is the underperformance signalling that inflation expectations are overblown? Perhaps the Fed knows something … it cut a key interest rate another quarter percentage point on Wednesday and said it expected inflation to moderate in coming quarters, as energy and commodity prices level out. “I am still not getting why gold is trading down here and crude is up there. So something’s gotta give,” said Jonathan Jossen, an independent floor trader on the COMEX gold floor.