The luster of gold will remain bright well into next year as the threat of inflation and the weak dollar will be facts of life for the American economy, metals analysts and economists told The New York Sun. Moreover, the intensified combat in Iraq will probably send more investors scurrying to own the precious metal.

Gold futures for December delivery closed yesterday at $433.50 in New York, just off the 16-year high of $436.10.

Investor appetite for gold has been modest since the late 1980s, as inflation hasn’t been an issue in the American economy. International traders and speculators have long seen gold as an efficient hedge against inflation.

That is the reason fingered by the chief economist of Griffin, Kubik, Stephens & Thompson, Brian Wesbury, who said the Federal Reserve’s policy of the past three years of “easy money,” or maintaining low interest rates, explains the current spike in gold prices. Mr. Wesbury said the “artificially low” American interest rates – especially relative to rates in Europe- has fueled price inflation across many basic commodity sectors, such as wood and steel. In turn, that has forced the core Consumer Price Index to an increase of 2.4% for the first nine months of this year, as compared to a 1.2% gain for the first nine months of last year.

Mr. Wesbury predicted, however, that the Fed, which he expects to take its benchmark funds rate to more than 3% by the middle of next year to combat inflation, will put a damper on gold’s party. “Inflation is a monetary problem,” he said, “and once the Fed takes some money out of the system, the reason to own gold goes away.”

Mr. Wesbury cautions that as with all economic issues, the inflation fears driving the increase in the price of gold have the proverbial silver lining. He dismissed popular concerns that American inflation is a function of the trade deficit, which is the difference between the dollar value of what the country imports and exports.

Currently, America is importing $559 billion more worth of goods than it is selling abroad. Many economists worry that America is flooding the globe with dollars to purchase those imports, while demand for American goods – and the dollars needed to purchase them from American manufacturers – lags, leading to inflation.

“This is nonsense,” said Mr. Wesbury, the Wall Street Journal’s 2001 Economic Forecaster of the Year.

“Our economy is the fastest-growing major economy next to China,” he said, giving America the purchasing power to buy all those foreign goods.

“Once the rate hikes kick in,” he said, “it’s goodbye to trade deficit woes and goodbye to the easy gold trade.”

One manager of a mutual fund primarily invested in gold exploration and production companies, Caesar Bryan of the $340 million Gabelli Gold Fund, said the surge of interest in gold is due to international investors’ betting the dollar will continue to drop in value relative to other world currencies. Specifically, he pointed to the belief popular among currency traders that the supply-and-demand fundamentals of the dollar are poor. The huge cash needs of wartime have begun to force Washington to expand sales of Treasury bonds to raise money, increasing the supply of dollars.

In that scenario, anticipating an increase in American inflation as the dollar declines in value relative to its peers, traders sell dollar futures and buy a combination of euro and gold futures. Owning the gold futures is designed to serve as a hedge against the inflation risk of the currency trade, as each monthly increase in the CPI sends the price of gold up.

A third theory behind the increase in the price of gold combines a host of unrelated issues. A veteran metals analyst, Jim Boustead of Refco Securities, said gold investors have benefited from the seasonal surge in demand from India, as November and December see a series of religious and holiday festivals. Traditionally, India represents between 10% and 15% of the world’s consumer gold market, according to a British company that studies the market for precious metals, Goldfields International.

Fighting in Iraq set off a fresh round of geopolitical concerns, in which gold – along with the dollar – is perceived to be a safe haven, Mr. Boustead said. “Even if there were no inflation concerns or worries about the greenback, the intensity of fighting in Fallujah would definitely keep gold well bid,” he said.

As inflation fears in America subside and the economy continues to expand, Mr. Boustead said, he is telling clients gold will begin to decline in price. But he expects it to stay above the $400 level until the dollar begins to regain traction against the euro.

A portfolio manager of a $25 million commodities hedge fund was dismissive of many macro-economic and geopolitical concerns. The manager, who spoke on background, said he and many other hedge fund traders were attracted to gold because of their computer-driven models.

“Look at the chart on gold, it’s probably in a nine-month bull market, with more traders buying it every day,” he said. That trader, who is based in Greenwich, Conn., said he has more than $10 million of his fund invested in gold futures.