Gold Prices: Next Level?

Gold prices have risen to record highs in 2010, leading many analysts to wonder how much higher gold can pop.
Publish date:



) --

Gold prices

have risen 11% in 2010 as eurozone sovereign debt fears, the


(BP) - Get Report

oil spill and surging unemployment curbed investor risk appetite and triggered a flood of gold buying.

But just how high can gold prices really go?

Doug Kass, general partner Seabreeze Partners Long/Short LP, who accurately predicted the market bottom in March 2009, said on

RealMoney Silver

that gold prices could "nearly double." Kass joined the camp of other famed investors who are predicting that gold could hit its 1980 inflation adjusted high of $2,300 an ounce.

Kass is not alone in his bullish position.

Jim Rogers

thinks gold should reach $2,000 regardless of a global recovery. Rogers told me in an interview that if world economies get better, "commodities are going to lead the way." But if world economies get worse, commodities will still be the place to invest because governments will have to keep printing money. Rogers isn't buying gold at record highs but he isn't selling either.

Perma-bear David Tice, chief strategist for Bear Markets, thinks gold will hit $2,500 an ounce by the end of 2010, but that the

S&P 500

will sink to 400. Others think that gold and the

Dow Jones Industrial Average

will return to its 1:1 ratio which can push prices as high as $15,000, according to Mike Maloney, author of

Rich Dad's Guide to Investing in Gold and Silver


"If history repeats and gold covers that same amount of currency supply that it covered in 1934 and in 1980 then we should be seeing prices around $15,000 an ounce or higher ... within the next 2-5 years."

Maloney counts currency supply as the amount of dollars in circulation as well as revolving credit, meaning that the amount people spend on their credit card and don't pay off counts as money in circulation. This precedent was set it 1980 for three months when gold covered the total currency supply and hit a then-high of $800 an ounce.

Why $15,000 Gold is Possible

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Other analysts are more conservative in their view. Dennis Gartman, author of the

Gartman Letter

, told me in a recent interview that he hasn't "the faintest idea

how high gold will go. I couldn't tell you if my life depended upon it other than the trend is up."

On the flip side, a handful of analysts are breaking with these big named investors and betting against higher gold prices.

First a Citigroup analyst, Alan Heap, said in a research note in early February that gold prices will sink to $805 an ounce by 2014 on the absence of inflation, a stronger U.S. dollar and withering demand from China.


Long positions held by money managers and broader non-commercial positions have fallen since November 2009 when the USD strengthened. Non-commercial net long positions are at 5x the average levels seen over the last 17 years."

Barclays Wealth agrees. Michael Crook, vice president and strategist, has actually been advising clients since November 2009 to short gold through the gold exchange-traded fund,

SPDR Gold Shares

(GLD) - Get Report

. Since then gold prices broke through $1,200 and continue to hit record highs, but Crook stands by the thesis, believing that the crisis premium, which has attracted investors thus far, will collapse as global economic conditions stabilize.

"Our specific recommendation was to purchase GLD put options that expire in January 2012 with a strike of 120 ... We currently maintain a high level of conviction around this investment recommendation."

Thus far investors have favored the more bullish calls on gold. The GLD currently holds a record of 1,306 tons and shares have risen almost 11% year to date. While some mining stocks like

Newmont Mining

(NEM) - Get Report


Randgold Resources

(GOLD) - Get Report

, which some analysts say can offer a 3:1 leverage to gold's spot price, have popped more than 15% this year.

Regardless of where gold prices head from here, gold buying is no longer a fringe investment reserved for "

gold bugs

," but is now an asset class unto itself.

As the financial crisis rocked global markets at the end of 2008, a trend started to develop of regular investors allocating a certain amount of their portfolios into gold. The recommended percentage is typically between 5%-20% depending on how aggressive the investor wants to be or just how much he needs to diversify against other assets.

This shift was underscored by gold interest from big-name investors who had profited off of the subprime crisis by betting against mortgage-backed securities.

In the fourth quarter of 2009, legendary investor

George Soros

almost tripled his gold holdings in the gold ETF, the GLD, from 2.5 million to 6.2 million shares as gold prices hit a then-record high of $1,227 an ounce. Soros sold over 500,000 shares in the first-quarter but is still the sixth largest holder of the GLD.

The largest holder remains

Paulson & Co.

, run by legendary investor

John Paulson

. The fund currently owns 31.5 million shares, which is 16.22% of the portfolio.

During the first quarter of 2010, large investment banks like

Bank of America

(BAC) - Get Report


Morgan Stanley

(MS) - Get Report

also ramped up their gold holdings. They bought 2.3 million and almost 1 million shares, respectively.

Currency fears and financial instability in eurozone nations remain some of the primary drivers of gold prices. Although the U.S.' core consumer price index for May rose only 0.1% and took inflation off the table, many analysts point to continued money printing and currency debasement as catalysts for higher gold prices over the long term.

The U.S. is currently $13 trillion in debt with $224 billion in interest payments due in 2010 fiscal year fueling rumors among doomsayers that the dollar will eventually be worth zero leaving gold as the only form of money.

"Intrinsically, the dollar is worth nothing. It's a dream painted on a piece of paper," says Rick Rule, founder of Global Resource Investments. "There's no particular reason why you, despite the fact that you live in the U.S., need to be a prisoner of the dollar ... use gold money, export your capital."

The only question is will gold money be worth $800 or $15,000?


Written by Alix Steel in New York


Alix joined TV in February 2007. Previously, she held positions in film and theater production, management, and legal administration. Alix has a degree in communications and theater from Northwestern University.