5 Reasons to Still Like Gold

Precious metals have become hugely popular with investors over the last couple of years and nothing attracts passion like gold. Whether it's Glenn Beck talking up the importance of owning the metal on his Fox show or the cash-for-gold shops popping up at retail centers like the Mall of America -- gold seems to be everywhere.

That's usually a bad sign from an investment perspective. When things are deeply and widely loved, there aren't too many marginal buyers left to bid up prices. In 2000, it seemed everyone was in tech stocks, just before the sector cratered. In the 1920s, word that shoeshine boys were playing the market prompted some wiser heads to move to the sidelines.

But gold may not be ready for the dustbin just yet, even though it's going through a ragged phase. Its price is down three of the last five weeks and last week suffered its worst decline on a percentage basis since last July. It has lost 3.8% since hitting a record of $1422.60/oz on the first trading day of 2011.

Is gold's magical run -- soaring 20% in the last year, 100% since 2007 -- over? As much as the gold haters would like to think so, the shiny yellow stuff may have life in it yet. Goldman Sachs has forecast gold at $1575/oz by the end of this year. And we're still a long way from gold's inflation-adjusted high of $2321.62/oz reached in 1980.

Here are five other reasons gold still has more to run:

1. Major central banks want inflation.

Last Friday, Federal Reserve Chief Ben Bernanke told the U.S. Senate that the Fed is "unwaveringly committed" to controlling inflation. Nice words, but actions seem to belie that reality. Gold, as a store of value, attracts followers when inflation rears its ugly head.

There's no inflation of note yet, but that doesn't mean the Fed doesn't want to see some. As more signs of economic recovery emerge, the Fed is in the process of effectively printing money to purchase $600 billion in Treasuries and maintaining its short-term interest rates at near zero. It insists it will complete its bond purchase program on schedule this summer and will keep rates low for an extended period. The market thinks into 2012.

In Europe, the European Central Bank is talking a tougher game, mostly to mollify inflation-phobic Germans. But it, too, has maintained an array of extraordinary programs in a bid to keep the economy moving ahead and deflation at bay.

Along with central banks, the politicians also may want a little inflation. With massive debts and very high fiscal deficits in the U.S., Japan and many European countries, the temptation to "inflate away" those obligations will be very tough to resist. When policymakers really, really want something, they often get it.

2. Major currencies all want to be lower.

President Obama complains about China's high currency, Japan complains about America's weak currency and France wants a different reserve currency altogether. On top of that, Brazil complained late last year about "currency wars" in highly charged language aimed almost entirely at the U.S.

Truth is, everyone wants to have a lower currency to help drive their economic recovery. But the U.S., the euro-zone and Japan can't all go lower together. That doesn't mean that policymakers won't still try and make it so.

This race to the bottom raises questions about the value of each fiat currency. And when the value or durability of currency is in question, people reach for gold. The recent currency contretemps is one reason that World Bank Chief Robert Zoellick said global leaders should at least discuss the possibility of gold playing a role in a revised world money system. Up until the early 1970s, the dollar was backed by gold.

3. Central banks are buying gold again.

In the late 1990s and early 2000s, gold became increasingly derided as a barbarous relic with no usefulness. Many central banks began dumping the gold hordes they previously held to back or defend their currencies. Famously, the U.K. sold some 400 tons of its gold just before prices started zooming up again, quadrupling from the U.K.'s sale price.

Today, even with prices so much higher, central banks have rediscovered a taste for gold, primarily in the emerging markets. China and India (both the central bank and individuals) have bought plenty of gold and both are expected to be big buyers in 2011. Analysts believe that the accumulation of gold dovetails with both countries' view of themselves as emerging powers.

4. Euro-zone crisis is still not resolved.

It has migrated away from the headlines, but the euro-zone crisis is still very much with us. Greece and Ireland have been bailed out, and many expect Portugal will suffer the same fate. Three years ago, the notion of the euro-zone breaking apart didn't even merit discussion. Now that existential debate is front-and-center.

Most investors believe Greece will have to restructure its debt, and the stringent austerity programs may erode support for the euro in suffering countries such as Spain, Portugal and Ireland. Debate of a "two-speed" euro-zone, and the possibility of a smaller monetary union or bifurcated monetary union, underscore the messiness of the euro-zone problems. Expect flare-ups from euroland to boost gold one or two times this year.

5. We live in a precarious world.

Extremely passionate gold backers have a dark view of the world. This group probably has canned goods, seeds and some bullets in the portfolio. But it doesn't take a goldbug's grim forebodings to appreciate that we live in a precarious world that could spark into trouble at unexpected moments.

The goldbugs worry about energy shortages, another banking crisis, terror attacks, failing governments, runaway inflation and anything else that scare the shorts of the average Joe or Jane. As extreme as some godbugs can be, the fact is that we do live in a precarious world. For a growing number of folks, holding a bit of gold is a piece of security, something that will hold its value. Homes used to do that. Gold's always done that.