Gold: The hedge against political stupidity

Gold has started to rally again. And some think new record highs are in sight as investors worry about all the twists and turns in Europe. Click chart for more on gold and other commodities.

NEW YORK (CNNMoney) -- Gold is said to be a hedge against inflation, deflation and all other nasty sorts of economic bugaboos. It looks like it may be a hedge against political incompetence too.

The price of gold has surged more than 7% in just the past week and a half. The yellow metal is now trading around $1,750 an ounce.

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That's still a bit lower from the all-time high of about $1,924 from just a few months ago. But experts think that a new record could be in the cards soon if the debt melodrama in Europe (As George Papandreou Turns?) continues.

The incessant chatter and gossip -- will there be a referendum or not? -- is only serving to make already jittery investors even more skittish. That's a perfect recipe for a rally in gold, which is the quintessential safe haven because it's something with tangible value ... as opposed to a stock or paper currency.

"What's driving gold right now is that investors don't know what to do. All the rumors in Europe are making people worried," said David Beahm, vice president of economic research with Blanchard & Company Inc, a New Orleans-based investing firm that specializes in gold and other precious metals.

"Gold may be volatile but I can't see a reason why it would go down much. I think a price of $2,000 by the end of the year is still possible," Beahm added.

But it's not just the latest EU scuttlebutt that is lifting gold. Actual news is helping too. In somewhat of a surprise move, new European Central Bank president Mario Draghi announced that the ECB was cutting interest rates.

That could put more pressure on the Federal Reserve, which did not announce any new policy moves after its meeting Wednesday, to do something if the global economy continues to founder.

Greece goes all in

The Fed can't cut rates (they're already at zero) but some are urging the central bank to start a third round of bond buying, a so-called QE3. In fact, one Fed member, Chicago Fed president Charles Evans, dissented with the central bank's decision to stand pat. According to the Fed statement, Evans wanted "additional policy accommodation at this time" -- which is likely code for QE3.

If Evans eventually gets his way, more bond purchases would probably suppress the value of the dollar as investors would once again worry that the Fed is just printing money. And that would create inflation fears which would lead to even higher gold prices.

Gold traders are also likely feasting on bullish comments from influential hedge fund manager David Einhorn on Tuesday.

During a conference call to discuss the results of Greenlight Capital Re (GLRE), the insurer that Einhorn is chairman of, Einhorn gushed about how well he thought gold miners would perform. He said his firm has shifted some money into the Market Vectors Gold Miners ETF (GLD), adding that he expected gold prices to continue to rise.

Einhorn is a big enough name that what he says could become a self-fulfilling prophecy. Just ask any investor who was caught with a long position in Green Mountain Coffee Roasters (GMCR), which has plunged more than 30 % since Einhorn said he was shorting it a few weeks ago.

Commodity bears aren't going anywhere

Still, any investor rushing into gold now has to be extremely careful. Rob Stein, senior portfolio manager with Astor Asset Management in Chicago, said that gold definitely could hit $2,000 before long. But he also thinks the bubble may eventually burst. We've seen that movie before several times. It never ends well.

Gold will probably remain attractive as long as Europe, and to a lesser extent the U.S., remains in economic crisis mode. But this too shall pass. It may not be for a couple of years, but Stein said gold prices can't remain this high forever. Enjoy it while you can.

"Economic growth will eventually hurt gold," Stein said. "If we get to 2013 and the Fed finally starts raising rates like it says it will, you'll see gold head back down. I could easily see it falling to $1,000."

Then again, 2013 is a long time away. And even if Greece and Europe finally get their act together, investors can then turn to the folly that is Washington, DC. Would it be any surprise to see gold move higher this year once the deficit supercommittee talks start to steal headlines from the EU?

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