Gold Futures May Be Headed Even Higher

Updated from Friday, Feb. 20

Interest in gold is soaring, as jittery and scandal-weary investors flock to the precious metal . And it could be headed much higher, according to one at least one gold bug.

Gold futures for April delivery closed at $1,002 an ounce Friday, trading over $1,000 for the first time in almost a year. Meanwhile, State Street Global Markets on Monday said assets in the SPDR Gold Shares (GLD Quote) have surpassed $30 billion, making it the second largest exchange-traded fund by assets in the world.

Henry Smyth, director of the Granville Cooper Gold Funds, says his charts suggest the precious metal, which is trading at $990.40 recently on the New York Mercantile Exchange, will reach an eye-popping $3,500 within two years. Dollar demand for gold went to $102 billion, an increase of 29% over last year, according to the World Gold Council's report released Feb. 18.

"It used to be people would ask why I was in gold," Smyth says. "Now they ask, 'How high will it go?' But the question they should be asking is, 'What will stop it?'"

He points out that investment vehicles are driving the demand. The World Gold Council reports that net retail investment rose 396% from 61 tonnes in the fourth quarter of 2007 to 304 tonnes in the same quarter for 2008.

SPDR Gold Shares saw its gold holdings jump 200 tonnes in the last month, according the fund data.

Smyth says another reason for gold's rise is that the absence of positive real interest rates. "The last brake on gold was when interest rates went up," he says. Interest rates are not expected to rise until after the economic crisis lifts, which does not appear to be any time soon.