Central banks around the world have been stirring together all the right ingredients for a big batch of inflation -- and this week's G-20 summit was just icing on the cake.

Despite some policy wrangling among the participants, the heads of state came together and reached near unanimous agreement on a framework to tackle the global economic crisis and prevent a repeat performance. It seems world leaders finally understand they'll need to work harmoniously if we're to escape from this recessionary quicksand.

Even though it was only a one-day meeting, the G-20 participants agreed to several reforms, including increased regulation on tax havens and hedge funds. All good things, in my opinion.

They also dropped a bombshell that dominated the news and sent the markets through the roof -- pledging $1.1 trillion in lending to help struggling countries through the crisis.

This is just one more example of how the U.S., and now the world, is willing to do just about anything and everything to get us out of the economic quagmire. Of course, these unprecedented measures will certainly have consequences down the road. There's little doubt we are sowing the seeds for future inflation.

That's why I'm currently looking to the shiny yellow metal... gold.

   

I'm expecting a solid rally in gold prices over the next year or two. Clearly, the government's spending binge (which has a 14-digit price tag) and loose monetary policy come at a cost, but those fears have simply been cast aside because the danger of not spending seems even greater. It doesn't take much to see the end result is going to be a big dose of inflation.

Right now, painful economic contraction is keeping things under wraps. But with oil creeping higher... interest rates at zero... massive spending on the way... and yesterday's summit agreement, inflation is looking more and more like a ticking time bomb.

In fact, the $1.1 trillion pledged during the G-20 summit is comparatively small potatoes. The U.S. government alone has spent, lent or committed $12.8 trillion to combat this crisis, according to Bloomberg. Just last November that amount was "only" $7.4 trillion.
 
Once this spending takes hold, I suspect it will slowly but surely help pull us out of this slump. And once that happens -- watch out! Inflation won't be far behind.

But what if I'm wrong about that? Well, either way gold seems to be a winning bet.

Gold is highly sought during times of turmoil as a reliable store of wealth and hedge against the unknown. That's why purchases of gold coins and bars in Europe have skyrocketed +1,170% year-over-year. So if this massive spending doesn't work, investors are likely to flock to gold. But if everything goes according to plan and these measures do lead us out of the dark, then inflation is going to rear its head... in which case investors would still turn to gold.    

Right now the precious metal has dipped below $900 an ounce as people have piled into equities instead. Why not? Stocks have been rallying hard in recent weeks -- and I've been glad to see it. But the market is running at a pace that is simply unsustainable. Given the major averages are up about +25% in less than a month, we're probably overdue for a pullback.

And don't let this powerful run-up give you a false sense of security -- the economy is still far from mended. Look no further than today's grim employment report, which showed the loss of 660,000 jobs last month and unemployment rising to a 26-year high of 8.5%.

So while other investors may be patting themselves on the back with their gains over the last few weeks, I am more interested in the bigger picture that is unfolding. And the more pieces that fall into place, the better gold is looking.

-- Nathan Slaughter

P.S. In my April issue of Half-Priced Stocks, I dug up a well-positioned gold miner that looks to be hands down the single best way to play rising gold prices. The company has one of the lowest extraction costs in the business and rakes in a profit of about $560 for every ounce of gold sold. More importantly, a recent discovery in Mexico (which contains over 17 million ounces of gold) could boost production dramatically over the next few years.

If gold rises like I think it will, then this company will be swimming in cash and investors are going to be flooding into these shares. 

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