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Commodities That Could Heat Up in 2011

Gold and Precious Metals

The momentum in gold and other precious metals might wane a bit in 2011, as investor appetite for risk assets picks up as the global economy recovers.

"The much stronger performance of other commodity sectors relative to precious metals over recent months, despite what is arguably an even more severe debt situation for sovereign debt risk, reflects a big change in market psychology," notes Kevin Norrish of Barclays. "With economic growth once again surprising on the upside, the re-emergence of sovereign debt concerns has much less of an effect on energy or industrial metals markets than earlier this year."

Still, analysts maintain a positive outlook for gold as the Fed continues its easy money policy and sovereign debt problems in Europe remain in focus.

Adrian Day, who runs an asset management company bearing his name, says gold should remain a defensive holding in investors' portfolios. "Currencies are losing purchasing power. People are buying gold because they do not trust paper money. They are buying it as a defensive measure, regardless of price," says Day. Investors are also likely to continue buying gold even as the economy recovers as a hedge against inflation. "If there is a recovery in U.S. and E.U., I don't see how that can happen without being accompanied by inflation. So copper and oil will do well, but so will gold."

Renowned commodity investor Jim Rogers who has said gold can rise as high as $2,000 an ounce and silver can still rise to $50 told TheStreet that he continues to hold both the metals, though he is not buying just now.

Other precious metals might be more volatile. Silver's sparkling rally in 2010 took everyone by surprise. But experts are uncertain whether the rally will continue in 2011. "Silver is even more dependent on investor interest than gold , as mine supply continues to hit record highs and shows no sign of slowing; hence we are less positive on silver relative to gold," according to Barclays Capital's Norrish.

How to Trade: Analysts advise those who are underinvested in gold to continue buying it on dips. The SPDR Gold (GLD) and the iShares Gold Trust (IAU) are two physically backed gold ETFs that are popular investment vehicles. IAU has a lower expense ratio and recently found place in the portfolio of George Soros.

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