"...Hardly anyone's noticed, but the frenzy of safe-haven bond-buying has just pushed real yields on US Treasuries below zero..."

IT'S BEEN A TOUGH WEEK for anyone Buying Gold just below its all-time record high of $850 per ounce last Friday.

By lunchtime this Thursday (Eastern Standard Time), the Gold Price had dropped almost 8% from its 27-year high of $849 per ounce - and in only seven days.

Even long-time gold investors, not least those of us who climbed aboard below $300 per ounce back in 2001-2002, can't help but wish they'd taken a little money off the table.

After all, a profit's not a profit until it's in your pocket. Not unless you're an investment banker holding subprime mortgage bonds in your "Level 3" accounts, that is.

But there's no profit even "marked to model" for last week's gold buyers yet. So should they quit now while they're only out by $60 per ounce?

The last blow-off top in Gold Prices - the spike of May 2006 - cost new buyers 20% of their investment inside six weeks. At today's prices, that would take us back to $680 per ounce.

Five months later, in Oct. '06, those gold buyers came to stand one-fifth short of break-even once again. And it took until Sept. this year to regain last May's level of $725 per ounce.

Can you now afford to sit on a loss in gold - earning zero in yield and paying for storage - until Feb. 2009...? We don't pretend we can see the future here at BullionVault. Blackjack and bridge are more fun than tarot, to our mind. But in lieu of tea-leaves and a crystal ball, we do like to study the past.

And if you won't study history when you're investing your money, just what do you plan to study instead?

To put that question another way, what else might new gold investors have bought last week that would have made them a quick profit instead?

The "smart money" of professional and institutional fund investors is surely shouting an answer. "Buy Treasury bonds," cries Wall Street and London, "most especially short-dated Treasuries!

"Quick, buy! Buy! BUY! before the Bernanke Fed takes its scissors to US interest rates again and tries to prop up the mortgage market with a fresh dose of cheap money!"

But if it's cheap money you want, then the US Dollar is already cheaper than it's ever been before in history. And glancing at what happened before once more today, we wonder whether Treasury-bond buyers might not want to take a longer-term view, too...

US government bond yields have now sunk so far, so quickly, that on Thursday this week - in a little-noticed event - they slipped below the latest reading for US inflation.

Yes, even on the Dept. of Labor's much-despised Consumer Price measure, the cost of living in America in October was officially higher than two-year Treasury yields today.

Two-year yields have dropped by more than 0.5% over the last month. They're dropped by nearly 1.5% since November last year. CPI inflation, on the other hand, has risen from 2.0% in January to above 3.5% last month.

In short, two-year Treasury bonds are now deemed so desirable - because the subprime mortgage disaster demands such aggressive Fed rate cuts - that investors are willing to let inflation destroy their wealth. (Or rather, the wealth of their clients...)

And why not? Everyone thinks Ben Bernanke will jump at the ghost of '30s deflation before he dares shadow-box the threat of '70s inflation. No doubt the world and his broker are right too, given his academic obsession with stopping the Great Depression seven decades after it happened.

Just maybe Bernanke's right, too. Maybe the housing slump - and the resulting loss of consumer spending - really do threaten such an ugly unwinding of US debt, the economy will slip into deflation. The major challenge to that view, however, is the ongoing rise in the cost of living, driven the surge in energy and food prices that's now being send east across the Pacific from China.

And given the slump in bond yields vs. this rise in official US inflation rates, what might it mean for Gold Prices?

The connexion is hardly strong enough to trade for a living. You'd be hard put to explain how it works to your friends and family at dinner tonight, either. (Trust me, I've tried...)

But when Treasury bonds start paying less than inflation - and real interest rates pay less than zero - the stage is set, according to history, for a strong rise in the Gold Market.

How crazy is that? Physical gold bullion pays you nothing, remember. So it's always a losing investment compared with bonds...right up until those fixed-income assets start paying less than inflation. Then the destruction of wealth by government debt leads investors, even if slowly at first, to start doing crazy things.

Crazy things like asking why-in-the-hell they should lend money to the Treasury if the Treasury won't even pay investors a real yield above inflation.

Then comes the even crazier response of selling Treasury bonds in a panic, pushing interest rates wildly higher and forcing Washington to offer a decent yield - say two, three or even nine per cent above inflation - in return for funding war, welfare and the rest of the government's spending programs.

Clearly, however, those crazy reactions in the bond market remain a long way off yet.

So for as long as the "smart money" continues to mistake a loss of wealth for a safe-haven investment, that leaves the rest of us with an even crazier choice.

Whether or not to Buy Gold - a non-yielding asset - to defend our wealth against the loss of real value in both the Dollar and bonds.

Call it spite if you must. But if the world's No.1 currency - and the world's No.1 source of debt finance - both fail to outstrip inflation, investors will slowly go mad. Mad enough, in fact, to buy a mere lump of metal, used as a store of value for more than 5,000 years, that still pays precisely zero.

Gold was for the birds only between 1980 and 1999. Real yields on 10-year US Treasury bonds, on the other hand, averaged 4.35%. Since the start of 2000, in contrast, gold has now gained more than 160%...the current setback notwithstanding.

Ten-year US Treasury bonds, on the other hand, have paid barely 1.9%. Last month real yields fell below 1.0%, less than one-third what they were paying a year ago.

Is it any coincidence that the Dollar's now toast? Is it any surprise that gold just shot to a near all-time record high?