Does every cloud have a golden lining?

It seems that the US authorities are going to choose devaluation as a way to correct the record trade deficit.

This is less painful than cutting incomes to reduce imports, although that is what it does in practice through lowering the purchasing power of the dollar.

However, this also has an impact on foreign holders of US assets. They don't like to see the value of their assets being devalued in terms of their own currency. Thus there is logic to hedging against the dollar by investing in non-dollar assets.

The problem is what to hedge in? Bonds are likely to fall if interest rates rise. The euro has appreciated a lot considering the weakness of the euro zone economy, ditto Japan. Swiss francs perhaps, but then Swiss price levels look too high already.

Equities then, not really when valuations are stretched and interest rate rises threaten to undermine the value of dividends.

Hence, if you want to hedge against the US dollar there is only one financial instrument available to you: precious metals whose fixed supply underpins their value in a world awash with paper money created by the printing presses of the Central Banks.

Last week the New York Stock Exchange launched a new gold depository receipt system (GLD) that allows anyone to buy units of one-tenth of an ounce of gold via a paper or, with an online account, an electronic trade.

This makes it far more convenient to own physical gold than used to be the case. Having a bucket load of gold coins under your bed was never that attractive as a safe asset class.

What this paper-gold system offers is also an alternative to owning gold mining companies. One skeptic said the definition of a gold mine was 'a hole in the ground with a man telling lies at the top', and it is true that this type of company has been the subject of much abuse by unscrupulous operators, although the big firms are all audited.

So will gold continue to rise in value, or is it past its peak? Certainly not if you think the US dollar is doomed to a further slide in value. Or if you think we are now in a new bull market for commodities.

Short term price fluctuations are perfectly possible, not least because the hedge funds take and unwind huge positions in gold from time to time. However, there is a school of thought that holds that gold will have to pass its previous all-time high of $850 before the current bull market is over.

In the meantime, if financial markets get themselves in a pickle - and the last time the US used dollar devaluation in 1985 set the scene for the 1987 stock market crash - then gold remains a safe haven. Besides, even if it declines then you will not loose all your money as you can do in shares, so at least the downside has a bottom.