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Gold: The Bulls and the Bears

Friday, 27 May 2011 | 5:32 AM ET

It’s the classic safe haven in a crisis, but as gold consistently trades at around the $1,500 per ounce mark, is it now overpriced?

Gold bars
Tom Grill | Iconica | Getty Images
Gold bars

Spot gold gained $6.31 an ounce to $1,524.41 early Friday morning, not far off the record $1,575 hit earlier in May.

With the situation in Greece still unsure, and worries about the ripple effect on other European countries increasing, precious metals look like a safe bet, according to some analysts.

There is increasing pressure on the US government, which reportedly has the largest gold holdings in the world, to sell off some of its gold.

Gold outperformed most asset classes over the past decade and prices have risen by more than seven percent so far this year.

The precious metal is often viewed as a bet to counter inflation, while the increased spending power of Indian and Chinese consumers has kept demand high at a time when supply from mining remains weak. A historically weak US dollar has also contributed to its attractiveness.

The World Gold Council, a gold industry body, told CNBC recently that it believes demand and prices will stay high for the rest of 2011.

Central banks in particular drove demand for gold in the first three months of the year, according to the group's managing director Marcus Grubb.

“Market sentiment toward gold has become more positive over the past few days, as illustrated by the resumption of net inflows into ETFs," BNP Paribas analyst Anne-Laure Tremblay said in a research note.

Gold ETFs are exchange traded funds where the principal commodity being traded is gold.

“I believe that the gold price will trend higher from its current levels in 2011," she said.

The Bears' Case

Not everyone is bullish on gold. High-profile investor George Soros has sold off the bulk of his gold holdings in recent months, and called gold a bubble.

Where Soros leads, others often follow, and the bears have also got some powerful arguments in their roster.

The most obvious argument against stocking up on gold is that the metal does very little. It won’t earn you interest, pay you rent or pay out dividends.

And demand from consumers remains relatively low compared to the demand for gold bars and coins. The retail market for gold took years to recover from its 1970s slump.

"We are in for a prolonged period of prices treading water and probably stagnating at around $1,500," Commerzbank analyst Eugen Weinberg told Reuters Thursday.

“I wouldn't be looking for as much positive dynamic going on, despite the demand for it as a safe haven right now being fueled by the debt crisis," Weinberg added.

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