Gold Still Golden

gold stocksI like gold anytime; inflation, deflation, high interest rates, reduced interest rates, weak dollar, strong dollar. I like it for one simple reason — it is something very tangible and very valuable. Most investors, however, like to flock to it only when certain macroeconomic factors align, such as a rising price environment and volatile currencies, particularly the U.S. dollar.

Yet, one more piece of proof that the crash of 2008 has changed everything is that, almost two years later, with virtually no inflation in sight, investors’ infatuation with gold is returning. Even some of the world’s most famous hedge fund managers, such as George Soros and John Paulson, have fallen under gold’s spell. Judging by recent quarterly filings with the Securities and Exchange Commission (SEC), Soros Fund Management reportedly increased exposure to the SPDR Gold Shares exchange-traded fund (ETF) to nearly 13%, compared to a mere seven percent reported at the end of the first quarter.

Additionally, further rebalancing the hedge fund, Soros reduced the fund’s exposure to big names on the U.S. stock exchanges, such as Verizon, Pfizer and Wal-Mart Stores. In dollar terms, Soros Fund Management reduced exposure to North American equities by 42% quarter-over-quarter, from $8.8 billion to $5.1 million. As a result, the fund’s largest holding as of June 30, 2010, is the SPDR Gold ETF, with quarter-end market value of close to 600 million dollars.

Of course, there is speculation about why hedge fund managers all of a sudden would factor in gold and its related products. It always happens as hard cash is converted into gold bars. On one hand, the consequence is higher prices or the creation of an inflationary price environment. On the other hand, hedge funds are sounding the warning that a correction is on its way.

The fact that someone is investing in gold ETFs is not something that would raise a red flag. ETFs dedicated solely to bullion were introduced a few years back to make it easier for ordinary investors without adequate skills to invest in gold and diversify their portfolios. These days, regardless of whether you are an ordinary investor or a hedge fund, it is all about protecting your portfolio from sovereign debt explosions, volatile currencies, insanely huge budget deficits, etc. No wonder gold has again become the safe haven, even if there is no sign of inflation on anyone’s horizon yet.

True, jewelry demand is decreasing. But investment demand is picking up the pace, more than offsetting the shortfall from the decreasing demand for jewelry. This has prompted many analysts — and I have long agreed, too — to believe that gold’s upward price momentum is very likely to remain strong and trending upward for the next five years, if not more.

Note that, while the U.S. economy is currently operating under the dark cloud of deflation, the risk of higher inflation is also still very real. The amount of global government stimulus has reached gigantic proportions, which is very likely to start fuelling inflation, and sooner rather than later at that. Adding to the global fury hungry for more gold is the fact that the annual mine output has remained flat and/or trending lower for years now, signaling that the supply part of the equation is going to remain weak for years to come.

As a result, we are seeing gold price forecasts in the near term from $1,200 to $1,300 per ounce, almost without any effort. Note that, on Tuesday, gold futures for December delivery traded at $1,233.40 an ounce in New York. Perhaps even those optimistic forecasts are not optimistic enough and we could soon start seeing gold forecasts predicting prices of $1,500 to $2,000 an ounce again.