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Four Reasons to Be Bullish on Gold

Stocks in this article: GLD DGL GDX

Written by Kevin Grewal, Editorial Director at www.SmartStops.net

NEW YORK ( TheStreet) -- After a sharp selloff last week, gold prices are in recovery mode remaining above $1,100 per ounce and are likely to continue to appreciate in the future.

Inflation remains a concern amongst investors. One reason behind this is the huge pile of debt that the United States is accumulating. It is estimated that during the current fiscal year, the U.S. budget deficit will be north of $1.5 trillion and with the current spending measures, the nation's debt is expected to reach $18.5 trillion over the next 10 years. In order to help eat away at this massive deficit, inflationary measures are likely to be imposed in the near future. Gold is the ultimate hedge against a weakening U.S. dollar and inflation.

A second reason gold carries appeal is economic uncertainty. The U.S. labor force continues to remain stubborn, resulting in elevated unemployment rates. In fact, it is expected that the unemployment rate in 2010 will exceed that of 2009. On the global front, some governments are likely to implement quantitative easing to stimulate their economies, resulting in a rise in the value of gold.

A third force likely to support gold prices is the recent surge in investor demand. According to AngloGold Ashanti (AU), one of the world's largest producer of the shiny metal, investment demand for gold exceeded that of jewelry demand, a phenomenon not seen since 1980, when interest rates were astonishingly high. Retail investment demand for gold in North America and Western Europe rose 77% and the overall demand for gold has reached nearly 820 metric tons.

With this surge in demand, comes the fourth reason gold will likely appreciate: Supply and demand imbalances. Over the past decade, global mining production for gold has actually been declining, causing supply constraints. Granted, mining companies are expected to increase production levels, but this takes time to really have an effect.

In a nutshell, fears of inflation, economic uncertainty, growing investment demand and supply constraints are all reasons to be bullish on gold. Some good plays on the precious metal include:

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