Leading Article: Going for gold against all the odds

THREE YEARS ago, Japanese consumers with more money than sense started a fashion for drinking warm sake shimmering with tiny flakes of pure gold. This week, it is as an old-fashioned investment that the precious metal seems to be back in style - and not just among sake sippers.

George Soros, the man who made dollars 1bn by betting against the pound last autumn, has just put almost dollars 400m ( pounds 262m) into the shares of one of America's leading gold-mine firms. The thinking behind the purchase - effected over the phone between the New York headquarters of his investment firm and a Paris restaurant where Sir James Goldsmith was having lunch - appears to be that inflation, which has remained low over recent months, is set to head north again; and that gold, although it pays no dividends, will prove a better store of real value than shares, land or bonds denominated in any currency.

Mr Soros's move is puzzling, because most investors gave up reaching for gold at the first sign of war or inflation a decade ago. Time after time in the Eighties, the metal failed to do its stuff as a store of fundamental value. When the US-led coalition forces launched the war against Iraq in January 1991, the price of gold actually fell by dollars 27 an ounce. In the past 13 years, the metal has lost three- quarters of its value - making it look no more reliable than the pound or the lira.

Since last September, however, gold's prospects have begun to look up. Its price has gradually revived to almost dollars 350 an ounce, which is nowhere near the dollars 800 that investors saw during the second oil-price shock at the end of the Seventies, but still enough to double the price of gold-mine shares. That explains Mr Soros's interests in the shares rather than the metal itself: because the profits of mining companies rise a great deal when the gold price rises only a little, their shares are a more highly geared bet than the metal itself.

It is tempting to wonder, though, whether the great speculator might not be dazzled by the metal's sparkle. The main reason for thinking that the Nineties are likely to be a decade of renewed inflation is the heavy debts around the neck of many Western governments. A pessimistic view of public opinion in Europe and the United States suggests that neither Bill Clinton nor his EC counterparts will be able to raise taxes enough to finance the huge sums that their public sectors have already borrowed; reluctantly or otherwise, runs the argument, they will therefore be forced to reduce the value of the outstanding sums owed by loosening their grip on inflation.

This is not a view that is popular in the world's financial markets. On the contrary, the consensus is that a price explosion over the coming couple of years is, in fact, highly unlikely. If the majority is right, then both Mr Soros and Sir James Goldsmith, who sold him some of the mining shares but put the proceeds straight back into gold options, will lose heavily. But that is what great contrarian investing is all about: doing one thing when everyone else is doing the opposite. Wise commentators will leave Mr Soros's bank statement to pass judgement on his speculative acumen.