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Gold: An Answer to Low Yields & Inflation, BNY Mellon Says

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Lots of investors may be hoping Santa brings them a special present this year: gold.

That’s because the precious metal is expected to have another good year in 2011, and gold funds and ETFs are up about 25% or more so far in 2010.  

Expect the metal to stay firm or rise next year, says Kenten Yee, a senior research analyst for Mellon Capital and author of the report “The Golden Age of Returns?” released Tuesday.

The November round of quantitative easing announced by the Fed is expected to provide support for gold prices throughout the tenure of this policy and beyond, Yee writes.

His report, part of BNY Mellon Asset Management's global market outlook for 2011, notes that this easing policy is likely to keep treasury yields low at a time that government deficit spending worldwide has raised expectations about future inflation.

"Investors are likely to be faced with the choice of either buying treasury bonds with low yields or buying real assets, such as gold, that potentially can retain their buying power in the face of unexpected inflation or geopolitical turbulence," wrote Yee.

"In fact, we have seen a remarkably strong link between the real yields of U.S. inflation-protected bonds and higher gold prices since 2008," he explained.

The report suggests that gold is becoming a shadow currency against which all other currencies are evaluated as the world monetary base expands.

"It is important to not get caught up in the excitement of the gold rally," Yee cautions. "The strategy concept is to hold gold, not to speculate on price appreciation, but to help diversify your portfolio against unexpected inflation or shifting winds in global capital markets."