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The infamous solid gold falcon, initially intended as a tribute to the King of Spain by the Knights of Rhodes in appreciation for his gift of the island of Malta to the order in 1530, has recently been recovered. The falcon is 14 inches in height and solid gold, weighing approximately 48 pounds. Gold prices in late 2002 and early 2003, primarily as a result of increasing political tensions, have risen to $440/ounce. The falcon is currently held by a private investor in Istanbul, who is actively negotiating with the Maltese government on its purchase and prospective return to its island home. The sale and payment are to take place in March 2004, and the parties are negotiating over the price and currency of payment. The investor has decided, in a show of goodwill, to base the sales price only on the falcon’s specie value — its gold value. The current spot exchange rate is 0.39 Maltese lira (ML) per U.S. dollar. Maltese inflation is expected to be about 8.5% for the coming year, while U.S. inflaiton, on the heels of a double-dip recession, is expected to come in at only 1.5%. If the investor bases value in the U.S. dollar, would he be better off receiving Maltese lira in one year — assuming purhcasing power parity, or receiving a guaranteed dollar payment assuming a gold price of $420 per ounce?

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