Wave of money to fuel inflation and boost gold

LONDON (Reuters) - Inflationary pressures from central banks and governments printing money as they try to kick-start economic growth will drive gold to record highs in 2009, commodity-focused fund Baker Steel said on Tuesday.

Trevor Steel, managing partner of Baker Steel Capital Managers in London, said he favoured equities such as Gold Fields (GFIJ.J), St Barbara Mines (SBM.AX) and Resolute Mining (RSG.AX) to benefit from higher gold prices.

These companies will be boosted by a worsening economic backdrop and government responses, such as printing money to loosen inflationary constraints and ease debt burdens.

"History has shown that what is likely to give is monetary discipline," Steel said. "These actions are likely to ultimately lead to reflationary consequences, and as such that is a positive environment for gold and precious metals.

"Gold equities will remain volatile but we'll make a new high in gold prices this year," he added. "Gold, because it is independent of the ability of governments to increase its supply, has historically maintained its value."

Many western countries, including both the United States and Britain have either adopted or are considering printing money, as they grapple with a global credit crisis and the worst economic downturn in decades.

The Bank of England said last week it would buy assets -- mainly government bonds -- with 75 billion pounds of newly-created money to get the recession-hit economy growing again.

Printing money or quantitative easing was tried in Japan in the early part of this decade with limited success but has now become a watchword for central banks everywhere as interest rates approach zero.

Spot gold is currently at about $908 (662 pounds) an ounce and hit a record of $1,030.80 in March of last year.

"The jury is still out on whether we're in a deflationary environment at the moment," Steel said.

Baker Steel has several natural resources funds with assets of around $425 million, investing mainly in companies producing precious and base metals.

Its Genus Dynamic Gold Fund gained 52.8 percent throughout the last three months to the end of February, outperforming the benchmark FTSE Gold Mines Index which rose 15.8 percent during the same period.

BASE METAL CAUTION

On industrial metals, Steel sees considerable uncertainty due to demand being driven by economic activity.

"The outlook there is much foggier," he said. "There are some very oversold companies but there is still time for the investor to gradually move money into the general mining shares over the next 6-12 months."

Steel is especially cautious about base metal miners with large debt levels, looking to shore up their balance sheets.

"We definitely saw a bottom in gold equities last October, we may have seen a bottom in general mining shares ... but there is still time to get positioned," Steel said.

He added an improvement in base metal prices should not be expected until at least the second half of 2009.

"We will see base metal prices having periodic sharp rallies when we see signs of stock being re-built -- the question is how sustainable that is."

(Editing by James Jukwey)