As economic picture gets cloudier, the forecast for gold is brightening

At the risk of sounding like one of those pesky gold bugs, there is mounting evidence to support some extra exposure to the precious metal in most investor portfolios.

The near-term case for gold seems to get stronger each day, as was illustrated by the rally that followed the recent lackluster employment data.

It was no coincidence that on the day that the Bureau of Labor Statistics reported that just 69,000 jobs were created last month, the price of gold spiked nearly 4% to move above $1,600 an ounce. Meanwhile, the S&P 500 fell by nearly 2.5%.

“From a macro level, gold is seen as an asset of last resort in times of stress,” said Kevin Quigg, global head of exchange-traded-fund strategy at State Street Global Advisors.

Although it is neither fair nor responsible to suggest that we are heading toward an end-of-days scenario, it is safe to say that the risk-off mood is back, and for good reason.

Here in the United States, the latest employment data, coupled with weak first-quarter economic-growth numbers, could be paving the way for more quantitative easing.

John Spence, web editor at Global Trends Investments, pointed out: “Over the past few years, the gold price has tended to have a strong positive correlation to perceptions of potential quantitative easing, as gold is viewed as one of the few hedges against U.S. dollar debasement.”

In essence, as slower growth in the U.S. leads to expectations of further quantitative easing, the market’s perception — regardless of reality — likely will drive gold higher.

But the United States is only part of the story behind the near-term outlook for gold, according to Jeffrey Kleintop, chief market strategist at LPL Financial LLC.

In a report last week, he pointed out that part of the new unrest in the financial markets, which should support gold, has to do with the legislative elections in France and Greece, as well as a European Union summit later this month.

The price of gold, as tracked by the SPDR Gold Shares exchange-traded fund (GLD), has gained 5.4% since mid-May after falling 19% from its peak in late August.

The direction of the price of gold has momentum on its side, according to Mr. Kleintop, who calculated that about half the 19% decline in the price of gold can be attributed to the rise in the value of the dollar over that period.

“The strong dollar, driven by money flowing into the U.S. from Europe and elsewhere, has weighed on the price of gold as measured in dollars,” he said. “A turnaround in the direction of the dollar would be a plus for gold prices.”

There is, however, at least one wild card to consider with regard to the relationship between gold and the dollar, and that involves the European debt crisis.

According to Tim Harvey, senior vice president at ETF Securities LLC, the current level of risk associated with Europe has introduced the rare occurrence of a simultaneous rise in value of both gold and the U.S. dollar.

“In a normal market, if the dollar goes up, gold should trade down, but right now, the dollar looks better than any other currency,” Mr. Harvey said.

Ultimately, gold has the upper hand, and the dollar can’t keep up.

“Quantitative easing is back on the table because of the employment numbers, and the current administration will have to extend the Bush tax cuts — and they will have to deal with the fiscal cliff coming at the end of the year,” Mr. Harvey said. “The reasons to invest in gold are global instability and fear of quantitative easing.”

But even if the darkest projected outcomes don’t unfold with regard to the European debt crisis and the looming fiscal cliff in the United States, there remains a current of strength in gold.

As Mr. Kleintop pointed out, China and India now represent increasing demand for gold, mostly as a result of an expanding middle class and rising income levels.

Longer-term, gold will continue to benefit from its use as an industrial metal, even though only about 15% of gold is used for industrial purposes.

“Gold is the ultimate inflation hedge in a period of quantitative easing when the value of the dollar will be deflated,” Mr. Harvey said.

Questions, observations, stock tips? E-mail Jeff Benjamin at [email protected]