Top 3 reasons to invest in gold in 2011

A number of factors have collided since the start of the year to cause gold prices to rise, and that’s got analysts and newsletter writers arguing that the bull market in precious metals still has legs. Here’s a run-down of the top three reasons to invest in gold in 2011.

One of the most difficult aspects of investing is determining all the inter-related factors that lead to price changes for a particular commodity, whether that commodity be cotton, natural gas or gold ingots. Gold spot prices started off the year by tumbling more than $60. Since the start of February, prices have climbed more than $100 to settle (at the time of this writing) near all-time record highs around $1,430 per ounce.

It’s not just the looming threat of inflation that’s driving up gold prices, though. A number of factors have collided since the start of the year to cause gold prices to rise, and that’s got analysts and newsletter writers arguing that the bull market in precious metals still has legs. Here’s a run-down of the top three reasons to invest in gold in 2011:

1) Protection. In the face of global currency debasement, there are few remaining places left where investors can safely stash their cash. As the value of the dollar, the Euro and the Yen fall concurrently, the price of gold and other hard commodities including oil rises. Gold not only acts as a hedge against debasement but it’s also a tangible store of value. If we do face further geopolitical turmoil or natural disasters, gold should help protect your assets no matter what direction fiat currencies move in the short-run.

2) The Federal Reserve. So long as investors can smell the faintest whiff of QE3 in the air, they’re going to be wary of hunkering down in cash. QE2 has been a boon to gold prices, and QE3 could compound those gains by weakening the dollar so severely that investors and foreign investors run from it. Indeed, that will make U.S. exports more attractive on foreign exchanges, but it will no doubt ratchet up fears of inflation. Inject an economy will enough cash, and money velocity will start to rise. That’s when we run the real risk of forming bubbles, and my bet is the next bubble could be in precious metals. If you think we’re already in the midst of a gold bubble, wait to see what happens if the Fed announces plans to proceed with yet another round of quantitative easing after QE2 wraps up in June. Even the threat of QE3 has investors nervous.

3) Demand abroad. It’s tempting to look at the gold and precious metals markets from a distinctly American point of view, but much of the demand for physical gold and silver is also being driven by foreign markets. Investment demand for gold in China rose 84 percent in the fourth quarter of 2010, according to Money Morning, and that demand could keep growing there and in India as the expanding Middle Class in both countries is already living with high inflation. Should that inflation spike higher, expect gold prices to follow.

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