Four Reasons to Be Bullish on Gold

For one, gold is the ultimate hedge against a weakening U.S. dollar and inflationary pressures.
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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) - Get Report

, 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:

  • SPDR Gold Trust (GLD) - Get Report, which is the largest gold ETF and actually holds physical gold bullion. GLD is up 28.2% over the last year and closed at $112.31 on Wednesday.
  • PowerShares DB Gold Fund (DGL) - Get Report, which utilizes futures contracts to gain exposure in gold. DGL is up 26.4% over the last year and closed at $40.92 on Wednesday.
  • Market Vectors Gold Miners ETF (GDX) - Get Report, with 31 different gold mining companies like Barrick Gold (ABX) , AngloGold Ashanti and Goldcorp (GG) . Recently gold miners have been outperforming gold, much driven by healthy profit margins. GDX is up 44.7% over the last year and closed at $46.98 on Wednesday.

Although there are numerous factors that are likely to support the price of gold, it is equally important to keep in mind things that could depress its price such as inherent volatility and a decline in demand. A good way to protect against these risks is through the use of an exit strategy, which identifies price points at which an upward trend in gold could come to an end.

According to the latest data at

www.SmartStops.net

, the following price points for the ETFs mentioned are: GLD at $109.78; DGL at $40.09; GDX at $45.00. These price points change on a daily basis as they are reflective of market conditions and volatility; updated data can be accessed at www.SmartStops.net.

Written by Kevin Grewal in Laguna Niguel, Calif.

Kevin Grewal serves as the editorial director and research analyst at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Additionally, he serves as the editorial director at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.