Tags: Commodities, Economic Growth, Economic Recovery, Gold, Gold Prices, Gold/Precious Metals

Gold Will Shine No Matter What the U.S. Economy Does

By , Contributing Writer, Money Morning •

More analysts and investors are increasing their bets on gold with some forecasters saying the rally in the yellow metal will continue no matter what happens with the U.S. economy.

"Either a swift economic recovery or further dismal economic performance should bring new buyers into the market," Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt who expects gold to rise as high as $1,400 next year, told Bloomberg News. "A stronger economy would create more jewelry demand. If the economy stays weak or gets worse, then investors will be looking for a safe haven."

Gold will continue its longest rally in at least nine decades and may rise as high as $1,500 next year, about 21% higher than current levels.

Dan Brebner, an analyst at Deutsche Bank in London who is the most accurate forecaster so far this year, told Bloomberg gold prices might reach $1,550.

Altogether, analysts raised their 2011 forecasts for gold more than any other precious metal, predicting it will post its 10th consecutive annual advance.

Buyers have accumulated a record total of 2,078 tons of gold in 10 exchange-traded funds (ETFs), adding almost 278 tons worth $10.4 billion in 2010 alone, Bloomberg reported. Total holdings are almost twice Switzerland's official reserves of 1,040 tons, figures from the World Gold Council (WGC) show.

Leading the buying binge has been Soros Fund Management LLC, with total assets of about $25 billion. In January, George Soros described gold as "the ultimate asset bubble" at the World Economic Forum's meeting in Davos, Switzerland, and said that buying at the start of a bubble is "rational."

Even after selling 341,250 shares of the SPDR Gold Trust ETF (NYSE: GLD) in the second quarter, Soros' fund still held 5.24 million shares equal to almost 16 tons of the yellow metal.

Soros, who made $1 billion betting against the British pound in 1992, also purchased 11,000 call options that would allow him to buy an extra 1.1 million shares should gold prices move higher, according to the London-based Daily Telegraph.

Gold prices have gained 13% since January, beating the 8.4% return posted by U.S. Treasuries, and a roughly 6% decline in the Standard & Poor's 500 Index.

Investors are concerned about an economic recovery that appears to be weakening. Sales of U.S. homes fell to an all-time low in July, and the economy grew at a 1.6% annual rate in the second quarter, less than previously thought, the Commerce Department said Aug. 27. U.S. growth will slow to 2.8% next year, compared with 3% in 2010, according to forecasts compiled by Bloomberg.

But while the U.S. economy struggles, investors betting on gold may do well if emerging market economies continue to support the global economy with strong growth. The International Monetary Fund (IMF) said on July 7 that global economic growth would be 4.6% this year, the most since 2007.

Under that scenario, purchases of jewelry could increase, reviving demand that fell to a 21-year low in 2009, Jochen Hitzfeld, an analyst at UniCredit SpA in Munich, told Bloomberg.

Investment demand last year exceeded jewelry consumption for the first time in three decades, according to London-based GFMS Ltd. That trend continued in the second quarter, with total demand advancing 36% to 1,050.3 tons, the WGC in London said Aug. 25.

Imports by India, the world's largest bullion buyer, may hit 625 tons this year, compared with an estimated 480 tons to 485 tons last year, according to Anjani Sinha, chief executive officer of National Spot Exchange Ltd., the country's biggest exchange for trading physical gold.

In the long run, the likeliest possible outcome of the planet's economic troubles is inflation, given the recent actions of spendthrift governments like that of the United States. And gold offers investors a tangible asset that has inherent value, compared to a fiat currency that's only as good as the word of the government that issued it.

Even though investors have made the SPDR GLD ETF into the world's largest holder of bullion, Peter Krauth, a well-known commodities expert who is also the editor of the Global Resource Alert thinks there's no substitute for physical gold.

"There's nothing like holding a gold coin or gold bar in your hands. This is the oldest and most direct form of gold ownership," Krauth, recently said in an interview for Money Morning.

And Peter D. Schiff, President and chief global strategist at Euro Pacific Capital Inc., seconds that notion.

"I continue to recommend that investors hold 5% to 10% of their wealth in physical precious metals," he wrote in a recent Money Morning article.

"Aside from the likelihood that gold and silver will rise in price, precious metals offer timeless benefits, such as financial privacy, elimination of counter-party risk (if you store
them yourself), as well as protection from government confiscation, onerous securities
regulation, and punitive tax rates."

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