Additional data from the OECD shows that even though debt burdens are at record highs, interest costs are not rising. This is due to the low interest rates in nations such as the UK and the US. It is because of these low interest rates that the gold bulls also take the central banks to task.

There is no central banker who receives more criticism from the gold bulls than Ben Bernanke, the head of the US Federal Reserve. The Fed’s critics believe that its attempt to force interest rates down by unleashing an unprecedented expansion in the monetary base of the US economy and the purchasing of all kinds of US government and financial sector debt is bad policy. They believe that the Fed simply bailed out those responsible for the financial crisis and these measures will eventually usher in inflation.

However, it could be that the inflation fears are a little ahead of themselves at this time. The global economy is still quite weak as unemployment reaches a 26 year high, banks are still reluctant to lend and consumers around the world seem to be gripped by fear once again. Recent consumer confidence numbers from the US show this clearly as they dropped to a ten month low – leaving many on Wall Street scrambling for possible explanations.

At this point in time, it seems that the Fed and other central banks are doing what they have to do so that the economy can stand on its own. As some call for gold to reach levels of $2000 per ounce or more – it would be best to step back and take an inventory of the facts. This is not to dismiss the arguments of the gold bulls. They are not altogether invalid. But for the kind of inflation to take hold that would result in an upwards explosion of gold prices from current levels, the Federal Reserve and other central banks would have to throw in the towel and abandon the fruits of the hard won victory against inflation almost thirty years ago. At this point, it would seem that a policy error is a more likely reason for inflation getting out of control rather than outright indifference.

What they must do is to ensure vigilance against inflation, communicate to the markets that they are steadfast in their commitment to maintaining price stability and demonstrate that they are willing to stand up to political pressures to keep interest lower for longer should it no longer be prudent to do so. In addition, it must be made clear that the policy response from central banks was unprecedented but so was the depth of the financial crisis.

On the fiscal policy side of the equation, governments will have to raise taxes and cut spending as gingerly as they can. Any government which states that they only have to cut taxes and the road to reducing government deficits will be painless is simply not being straight with its citizenry.