5 Reasons Gold Will Keep Its Luster

NEW YORK (TheStreet) -- As market volatility and economic recovery concerns continue, gold has staying power.

First, it has appeal due to scarcity. The primary driver behind this is a 3% decline in global mine production. That, coupled with increased demand, will leave a supply and demand imbalance that will likely result in positive price support.

Second, the inevitable fear of inflation continues to loom. With the Federal Reserve keeping interest rates at record low levels, and with the printing of excess money and the massive amount of debt accumulating from excessive borrowing, these decisions will eventually catch up to the country and result in inflation, if not hyperinflation.

Additionally, there is no real relief from the revenue/expenditure imbalance seem in Washington. For the first time in 26 years, in the month of April, when revenues from income taxes are collected, the U.S. Treasury reported a monthly deficit. With unemployment at stubbornly high levels and corporations reluctant to hire, the revenue stream from taxes will continue to suffer in the near future.

To further add to gold's appeal, it is being used as a monetary asset illustrated by a broad shift in central banks' attitude. Nations such as Russia, the Philippines, India and China all have increased their gold holdings to strengthen their balance sheets, decrease risk and mitigate risk against the potential decline in the U.S. dollar.

Lastly, gold has strong fundamentals and remains relatively cheap when compared with the metal's inflation-adjusted peak from the 1980s. In fact, at current prices, gold is about 50% below this peak and has plenty of room to head upward.

Some ways to play gold include:

SPDR Gold Shares ( GLD), which closed at $117.21 on Thursday.

iShares COMEX Gold Trust ( IAU), which closed at $11.74 on Thursday.

PowerShares DB Gold ( DGL), which closed at $42.63 on Thursday.

Market Vectors Gold Miners ETF ( GDX), enabling one to gain exposure to gold mining equities, which offers leverage to gold-price appreciation. GDX closed at $49.38 on Thursday.

Although gold will likely remain the ultimate safe haven and is poised for positive price support, it is equally important to consider the inherent risks involved. To help protect against these risks, the use of an exit strategy that identifies price points at which an upward trend could come to an end is of importance.

According to the latest data at www.SmartStops.net, these price points are GLD at $115.28; IAU at $11.55; DGL at $42.02; GDX at $47.74. These price points fluctuate on a daily basis and are reflective of market volatility.

Written by Kevin Grewal in Houston

At the time of publication, Grewal was long DGL.

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.

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