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In a report published by JP Morgan, fears of inflation are now being driven by concerns over exit strategies as far as the US Federal Reserve's unconventional monetary policy and the US government's massive fiscal deficits are concerned.

In a congressional testimony on Wednesday, Fed Chairman Ben Bernanke said that the rise in US long-term interest rates appeared to reflect "concerns about large federal deficits but also other causes".

However, he added that the US needed to "begin planning now" to reduce its ballooning budget deficit.

The US' efforts to move away from its current abnormal monetary and fiscal policy will draw increasing attention, with inflation expectations likely to strengthen even further. Based on recent gold prices, inflation expectations are expected to drive the price of gold beyond $1,000 around mid-August, and it could even hit $1,300.

While the immediate future could see the dollar remaining firm and gold prices falling because of profit-taking, inflation fears are unlikely to subside due to concerns over the exit strategy amid economic recovery and the continuation of an unconventional monetary policy.

In 2008, only gold and US treasuries recorded gains, of 5.77 per cent and 13.24 per cent respectively, as the world's other key markets took heavy losses.

For example, Libor (London interbank offered rates) fell 69.7 per cent, while copper and oil dropped 53 per cent and 45.8 per cent respectively.

Even Berkshire Hathaway of the legendary US investor Warren Buffet tanked 31.7 per cent, while the Dow Jones industrial average lost 33.8 per cent.

Other big losers in 2008 included Nikkei (minus 28.7 per cent), FTSE (minus 49.5 per cent), S&P (minus 38.4 per cent), MSCI World (minus 42 per cent), high-yield corporate bonds (minus 24.3 per cent) and real-estate investment trusts (minus 48 per cent).

Looking ahead, asset allocation themes are about caution as well as selective increase of equities with increases in government bonds as well as investments in gold and agricultural commodities, according to Scott Campbell of Midas Capital International.

In an earlier interview, Campbell noted that the current global market conditions meant corporate bonds now offered good value while equities were back to a fairer value.

Japan's commercial properties have also become cheaper, while gold has been rising amid the global economic gloom.

In February this year he predicted that bullion could double in value from the current $1,000-per-ounce range.

Gold was traded in the $970 range this week.

As of February this year, the core-diversified-asset allocation of Midas Capital was as follows: bonds 22 per cent; cash 6 per cent; equities 22 per cent; property 3 per cent; commodities 12 per cent; and alternatives 28 per cent.

The global credit crisis will end, but capital will be scarcer, so it will be priced to reflect the risk, while profits will better reflect fundamental yields and growth instead of multiple leverages in currencies, private equities or properties.