Why Gold Will Hit $1,500—or More

04/07/2008 12:00 am EST

Focus: COMMODITIES

Michael Brush

Columnist, MSN Money

Michael Brush, contributor to MSN Money, finds two top gold fund managers who say the yellow metal is going a lot higher-and he says their funds are a good way to play it.

Gold's much-heralded climb above $1,000 an ounce was pretty short-lived. Gold's long-term ascent won't be.

With gold now trading closer to $900, this is a great time to load up on more exposure to bullion, which is only taking a breather before heading to $1,500 an ounce and higher.

That's the view of two gold gurus who have been correctly calling bullish advances in the yellow metal for years, most recently predicting the move to $1,000 an ounce.

"There is lot more upside for gold," says Thomas Winmill, who manages the Midas Fund (MIDSX), one of the top-performing precious metals funds, with a three-year average annual return of 41.6%. Winmill thinks gold could see $1,500 in 12 to 18 months.

Frank Holmes, who manages the second-best-performing gold fund this year, US Global Investors Gold and Precious Metals Fund (USERX), sees bullion going to $1,500 to $2,000 an ounce.  His fund is up 40.1% a year over the past three years.

Here's why they think gold will see $1,500 within a year or so.

1. The dollar's value is declining. "Gold is attractive as a safe haven when the dollar is declining," says Holmes. As investors move away from US assets, they sell the dollar and push it down. And they buy other currencies, pushing them up against the dollar.

2. More inflation on the way. Prices on intermediate goods-or stuff that is midway through production-advanced 8.8% during the 12 months through the end of February. Prices on early-stage "crude" goods were up 24%, according to the Bureau of Labor Statistics (BLS). "That is inflation in the pipeline," says Winmill.

3. Investors will seek greater safety. If the Fed lowers rates even more and inflation advances, the negative returns on government bonds will only widen. "Historically this has been very good for any kind of hard asset, and particularly gold," says Winmill, [who points out that] only a minuscule amount of money in managed accounts is dedicated to investments in commodities.

4. Oil is getting pricier. Holmes points out that that over the past five years, gold and oil prices have moved in sync 90% of the time. Typically, this creates a 10-to-1 relationship between the price of an ounce of gold and a barrel of oil. But that ratio can jump to 15 to 1 when geopolitical turmoil drives other investors to the safety of gold, says Holmes.

"If oil were to run to $125 a barrel because of a geopolitical event, gold would easily go to $1,500 an ounce," he says.

5. Gold should follow other commodities. Since so many other metals, including copper and oil, have smashed their inflation-adjusted price records, why shouldn't gold follow?, asks Holmes. If it does break through its inflation-adjusted high, set in 1980, it would trade north of $2,000 an ounce.

[One way to play this trend] is to simply buy shares of these funds.

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