The Gold Rally May Not Be Over Yet

Gold's long rally paused briefly in May, but analysts say it is far from over. Even though the price of an ounce of gold has fallen 3.6 percent to $1,204.25 as of May 25 from a record $1,249.40 on May 14, the median prediction in a Bloomberg survey of 23 traders, analysts, and investors suggests it may reach $1,500 by the end of the year, a 25 percent gain from today's level. "You could see gold go up another $1,000," says Evan W. Smith, who helps manage $2 billion at U.S. Global Investors (GROW) in San Antonio. In 2006 he correctly predicted that gold would reach $700 an ounce within two years. "All of the turmoil and problems we've seen in Europe are just another reminder that there's a lot of value in gold as a safe haven," he says.

Traditionally, investors favor gold when the dollar weakens and inflation gains. Yet the metal can also advance in times like these, when the opposite conditions prevail. Gold rose 5.8 percent in 2008, when U.S. consumer prices gained 0.1 percent. The metal added 18 percent in 2005 when the U.S. Dollar Index, a measure against six other currencies, advanced 13 percent. Gold rose 9.8 percent this year as the U.S. Dollar Index jumped 11 percent and U.S. consumer prices dropped in April.

What's up? Both the dollar and gold are benefiting from worries about the global economy. As some investors see it, the dollar will eventually succumb to those concerns as well. "People are afraid of the debasement of all the currencies," says Peter Schiff, president and chief global strategist for Darien (Conn.)-based Euro Pacific Capital. "What's surprising is that gold is still as low as it is." He predicts a price of $5,000 to $10,000 an ounce in the next 5 to 10 years.

Some big-name investors agree. Paulson & Co., the hedge fund run by billionaire John Paulson, is the biggest investor in SPDR Gold Trust (GLD), the exchange-traded fund that owns bullion. The fund owns 31.5 million shares, or about 96 tons, a May 17 regulatory filing showed. George Soros' Soros Fund Management was the sixth-biggest investor in the fund in the first quarter, according to a filing. He trimmed his holding by 9.6 percent from the previous quarter.

Central banks and governments are also buying gold, adding 425.4 tons last year, the most since 1964 and the first expansion since 1988, data from the World Gold Council show. They may expand their reserves, which now total 30,116.9 tons, by 192 to 289 tons this year, according to CPM Group, a research and asset management company in New York.

Meanwhile, gold supply from mines, which peaked in 2001, fell in five of the last eight years, data from London-based researcher GFMS show. Companies are digging deeper to extract dwindling reserves, with mines in South Africa extending as far as 2.35 miles into the earth.

Despite the recent runup, investors who bought at the historic peak are still waiting to break even. After adjusting for inflation, gold is at just half the level it reached in 1980, when the price rose to $850, equal to $2,266 today.

The bottom line: Uncertainty about global economic health is boosting the price of gold, even as the dollar strengthens and inflation remains tame.

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