Last week, I read two articles on gold. One, in U.K. daily The Independent, was very bullish. The other, from the U.S. financial Web site MarketWatch.com, was bearish, and favored equities no less!

From my contacts, it is clear that some of our readers are equally confused as to the outlook for the alluring, yellow metal. So let me offer an opinion.

Confusion is entirely understandable. This is because there are two major forces tugging at the underlying price of gold, the two, contrary forces of stagflation — inflation coupled with slowing growth — which are currently and unsurprisingly causing great confusion to our government, the Fed and to many of us investors.

As we warned over a year ago, to the astonishment of some at the time, our economy is heading towards stagflation. It is caused by a subprime-induced economic recession and low cost, liquidity-driven financial inflation, both at the same time.

As we have also warned repeatedly, stagflation is a central banker's nightmare. That is why we have had such sympathy for Fed Chairman Ben Bernanke, who I believe was handed a poisoned chalice of government-driven stagflation by the very "political" outgoing Fed Chairman Alan "It wasn't me" Greenspan.

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(Incidentally, please do not get me wrong. I do not keep reminding people of these severe economic and financial threats to be a prophet of doom or to discourage healthy risk taking. I intend merely to warn our readers and thereby to enable them to take profitable, defensive financial positions before they are severely buffeted in the coming financial storm.).

So, back to gold — up or down?

The inflation element in stagflation encourages people to run to gold as a "store of wealth," a safe haven. This puts strong upward pressure on gold.

The competitive dollar devaluation that our government appears to hold covertly — all the while protesting the opposite, that it supports a strong dollar while shaming China for the same devaluation tactic! — has also resulted in a run to gold for the same reason. As the dollar declines, gold is seen as a way to preserve value.

These two motivations combine to form what is known as the "investment" demand — contrary to ordinary industrial or jewelry demand — for gold.

As our readers will know, governments do not like this investment attribute of gold. It tends to expose the blatant robbery of their own citizens through currency devaluation.

So, they have sought constantly to eradicate the store-of-wealth quality of gold by means of coordinated central bank sales of gold via the so-called Central Bank Gold Agreement (CBGA), nothing less than a cartel to create volatility and thereby exert downward price pressure, in order to destroy confidence in gold as a store of value.

Of course, when I questioned this subversive activity at the recent World Bank meetings, I was frowned at, and the allegation was furiously denied! Does that sound like a strong dollar policy?

One could argue that our citizens have been very badly served by this callus erosion of our national coffers. Here it is interesting to note that the governments of China, Russia and the Gulf oil states are all holders and even buyers of gold.

In addition to investment there is an underlying commercial or "commodity" demand for gold, which includes industrial uses like electronics and high-tech equipment, dentistry and finally, jewelry, in particularly high demand in the newly developing countries. In common with the rapidly growing demand for commodities, such as oil, from the newly capitalistic countries — especially in the Far East — the commercial thirst for gold is increasing markedly.

At the same time, the costs of mining and recovering gold have risen greatly. The result is that even at $700 to $800 a fine ounce, the supply of gold fell in 2007. There is a growing, underlying shortfall in supply, just as there is for "black" gold — crude oil!

In addition to the underlying increase in commercial demand and the nervous investment demand for gold, there is also a "panic" demand for gold.

In today's world there are two underlying forces of financial catastrophy. One is war risk. The other is a growing fear that our entire financial system has been abused and overextended by governments to the point of potential collapse.

So, the forces of commercial demand, catastrophic risk and investment as a store of value have been forcing the price of gold upwards. This has happened, despite coordinated International Monetary Fund and central bank gold sales of some 500 tons a year.

As our readers will know, we have long said that our government has "cooked" our official inflation figures to the downside to lessen Treasury interest costs, social security payments and to keep us (the people) quiet!

However, as the old saying goes, "You can't fool all the people all of the time."

Now that the inflation arm of stagflation is appearing through the political camouflage, gold is in strong demand and people are jumping aboard the golden coach.

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And now comes a recession!

The main cure for recession is a prompt lowering of interest rates and by that I mean much lower rates — two to three full percentage points lower than they are today!

While lower interest rates are normally bullish for gold, recession is not.

Despite increasingly frantic denials in the mainstream media, we have sought constantly to forewarn our readers of approaching recession.

The recent figures on retail sales, from the manufacturing purchasing managers index (ISM) (now significantly below 50 — indicating contraction), and now unemployment, which is up to a two-year high, all serve to indicate that the recession we warned of is looming, officially!

As gold investors know, recessions, which normally are the reverse of inflation, lead to falling demand for commodities and a shortage of cash, which are negatives for the basic underlying "commercial" demand element in gold.

Hence, as evidence of recession increases, downward selling pressure can be expected to be brought to bear on gold.

So there you have it: The outlook for gold is mixed, so watch carefully as the contrary forces of stagflation and catastrophy play out.

As of today, I feel that the upward pressures on gold are likely to prove stronger than those of price erosion.

Few evolving events occur in straight lines, so expect a certain amount of volatility as the news of inflation and recession continue to hit the market.

The joker in the pack is the ability of our current, severely abused and overextended financial system to withstand the coming stagflation storm.

Gold provides an insurance policy against catastrophy.

Therefore, my personal view is, stay with a high asset allocation to gold and buy on dips.

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