Here's Allan Robinson's At The Bell which you'll find in Thursday's newspaper:

Deflation is in the air, yet gold rose yesterday to more than $900 (U.S.) an ounce.
The S&P/TSX global gold index, which has been lagging bullion, soared 19 per cent yesterday to 267.35 points.

Gold bullion, like the world's currencies and bond markets, is caught up in the massive unwinding of debt by speculative hedge funds, said Bill Belovay, a portfolio manager for BMO Precious Metals Fund, which has about $60-million (Canadian) under management.

“The gold price has risen due to the increase in the lease rates by the central banks,” said Mr. Belovay, who is both a geologist and a mineral economist.

WHAT ARE LEASE RATES?

Speculative hedge funds were borrowing gold at rates of interest below 1 per cent and the five-year average rate was 0.12 per cent, he said. The funds would turn around and sell the gold and reinvest the proceeds in higher yielding securities such as European bonds. It was a part of what was known as the carry trade.

However, the one-month gold lease rate has increased to 2.65 per cent as banks worry about the creditworthiness of the borrowers. “Now comes the time that [the funds] have to repay the gold,” Mr. Belovay said. Gold is rising as funds have to buy the gold they need to return to the banks.

Carry trades are no longer lucrative for hedge funds and the banks are clearly saying the gold lending window is closed. “It's a slow painful way of giving a message to the system.”

But from the perspective of a long-term investing strategy, the changes under way are positive for bullion, Mr. Belovay said. The withdrawal of banks from the gold lending business to funds should result in less gold coming on the market, he said. “In looking further out, the credit crunch should eventually cause the gold price to rise because there is no capital available to start new mines, so the supply should diminish.”

The BMO Precious Metals Fund has good exposure to senior gold mining companies and potential merger and acquisition candidates sitting on gold deposits once the credit crunch eases, Mr. Belovay said. “But in the short term everything is high risk,” he said. “The game is changing every hour, basically.”

A PERFECT MARKET

But right now it looks like a perfect market for bullion. The fear over the financial crisis is enhancing it as a safe haven, the demand for gold coins by the general public is so strong it is outstripping the ability of various mints to produce them and there are even indications that central banks may be reconsidering their gold-selling strategies with an eye on increasing their exposure to gold, according to Dundee Wealth Management Inc.

Strategists are also looking for the possible decoupling of gold from the U.S. dollar. Traditionally, U.S.-dollar strength tends to correlate with weaker bullion prices.

“Indeed, one day the gold market will be less slavishly tied to the dollar/euro rate, but I don't know when that day will come,” said Martin Murenbeeld, chief economist at Dundee Wealth. “Both Europe and the U.S. are moving rapidly toward significant fiscal and monetary reflation, meaning gold should rise against both currencies, regardless of whether the dollar is up or down against the euro.”

And there are signs that may be happening. “On Monday, the euro dropped against the dollar and gold rose $30 (U.S.),” he said. “We are starting to see some signs of the break. That is the key.”