$1,300? Some say gold may hit $2,300!

By Paul R. La Monica, editor at large


NEW YORK (CNNMoney.com) -- Gold finally traded above $1,300 an ounce Friday morning. So is that the peak or can the precious metal actually head even higher?

As tempting as it is to say that gold is an absurdly overvalued yellow bubble, several pretty savvy people say there are compelling reasons for gold to keep climbing.

Some investors are worried that the Federal Reserve's commitment to buying more Treasurys could mean higher inflation down the road. So far, inflation has not been a near-term problem. And the chart at the top of this page clearly shows that gold can go up without inflation pressures.

At the same time, fears of an economic slowdown and deflation in Europe and the United States haven't completely gone away. And gold often rises when people are nervous.

So in either scenario -- economy tanks or economy heats up and inflation takes off -- gold could go up.

"Gold is not just an inflation hedge anymore. It's a systemic risk hedge," said Valentijn van Nieuwenhuijzen, head of fixed income and economics at ING Investment Management in The Hague, Netherlands. "Whatever shock to the financial system you can think of materializing, that's a reason to buy gold."

With that in mind, van Nieuwenhuijzen said that he would not be surprised if gold prices headed even higher for at least the next three to six months.

Some think the gold rush could last even longer than that. Stefane Marion, chief economist and strategist for NBF Financial in Montreal, points out that gold actually may not be as expensive as gold bears claim.

Marion said that some are arguing that gold is too pricey because it is trading at a historically high level when compared to a widely watched index that tracks the dollar versus a basket of other currencies.

But Marion points out that this index only includes six currencies and is heavily weighted toward the euro. He said that if you look at gold prices when compared to another dollar index that the Federal Reserve uses, which is comprised of 26 currencies, gold still is trading about 50% below its peak price.

Marion said gold would have to rise another $650 or so an ounce before it would truly look overvalued. That puts you close to $2,000 an ounce.

"It's good to be prudent when looking at gold and this is not to say gold hasn't had a good run already. But the valuation may not be as stretched as you might think," he said.

David Beahm, vice president of economic research with Blanchard & Company Inc, a New Orelans-based investing firm that specializes in tangible assets like gold and other precious metals, agreed.

He noted that gold prices, when adjusted for inflation, are still well below where they were in the early 1980s. He said that factoring in inflation, gold could climb as high as $2,200 to $2,300 an ounce.

Beahm conceded that gold may pull back a bit in the short-term because the recent move up has been extremely quick and may be a case of coming too far too fast.

It's also unwise to go overboard and put too much of any particular investment in your portfolio. Owning some gold-related investments, be it the commodity itself, mining stocks, precious mutual funds or exchange-traded funds, makes sense. But it should not be the lion's share of your assets.

That said, Beahm thinks the ingredients are still in place for gold to head significantly higher over the next three to five years.

"For gold prices to not keep going up, the economy would have to improve to the point where the Fed felt it didn't need to print money, the dollar would have to strengthen and the problems in Europe would have to end. We don't see that happening," he said.

Reader comment of the week, Abbot angst and 1,300! I wrote on Wednesday about how more companies are boosting their dividends. While that may be boring, the quest for higher yields is also a good sign that investors are acting more rationally. Paul Rubillo agreed.

"Dividend + Compound Interest = wealthy retirement. Slow and steady wins the race," he wrote.

Slow and steady may be great for investing. But it's not good when you're recalling a product for children. I ranted in a Buzz video Thursday about how poorly Abbott Laboratories handled its Similac baby formula debacle.

Here's a quick update. Late Thursday, Abbott finally had its recall Web site functioning smoothly and it even published a PDF with recalled lot numbers. But that was almost 20 hours after the recall was announced -- an eternity when babies and their feeding schedules are concerned.

Why did Abbott not make sure it could handle the increase in call volume and online traffic before announcing the recall? Or wait until it had the affected lot numbers ready to publish along with the recall?

You don't have to be a crisis management guru to predict that telling parents that something they're feeding their kid may have beetles in it would lead to a massive surge in phone and Web traffic.

Finally, over in Twitterland, I've been urging people to follow me so I could get to 1,300 followers before gold crossed $1,300. Gold was the victor by a few hours. Curses! But @ivanhoff, who's also the research guru at StockTwits, gets this glittering shout-out for signing up as the 1,300th Buzz follower.

- The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney.com, and Abbott Laboratories, La Monica does not own positions in any individual stocks.  To top of page

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