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TheStreet Open House

Why Gold Will Maintain Its Luster

Stocks in this article: GLD GDX DGL

NEW YORK ( TheStreet) -- Gold hit an all-time high in 2009, marking the ninth straight year that prices increased. Some suggest its uptrend will come to an end, however, there are numerous forces indicating the contrary.

The first supporting force behind gold's strength is the unconventional policies of the Federal Reserve. The Fed is expected to maintain its short-term nominal interest rate target near or at zero through 2010, which is likely to provide strong support to gold prices.

Secondly, gold has turned into more than just an insurance policy against a falling stock market; it has turned into an enhanced returning investment vehicle. Traditionally, the metal has been used as a protection mechanism against market volatility and inflation and generally has an inverse relationship with the stock market.

However, the most recent data suggests otherwise. Gold has been rallying alongside the general market. Since its low in March 2009, the S&P 500 has gained more than 65%, and gold has followed, adding more than 27%.

One reason that this price appreciation has been seen is due to the net increase in investment dollars seen into the precious metal. Central banks around the globe have been gobbling up gold to hedge against the debasing of their own and foreign currencies caused by the massive amounts of cash used to fund economic stimulus packages and to diversify foreign exchange reserves. Toward the end of 2009, nations like China and India went on a gold-buying spree, purchasing billions of dollars worth of bullion from the International Monetary Fund (IMF) adding to their reserves.

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