Just because the stock market has racked up three good days in a row doesn't mean gold should be out of the picture. In fact, here are three reasons to buy gold or gold-related assets, even if it means selling some stocks or bonds to get the money to do it.
1. Central banks are buying it.
Never mind the Federal Reserve. Here is a short list of non-U.S. central banks buying gold, big time: Russia, China, Mexico, Korea and Thailand. Tanzania may soon join the list, too. Mexico's central bank, for instance, had less than 10 metric tons at yearend 2010; between February and April of this year it bought 99.2 metric tons. Do they know something? When central banks from countries as economically successful as China and South Korea buy anything en masse there's a reason. After all, they're not long GE or GM. Further, the mere fact that they are socking away so much gold drives up demand, which in turn drives up the price. Takeaway: the price of gold will rise.
2. Supply is tightening.
There will be a modest growth in mine supply this year but overall supply is set to fall about 5.1 percent this year. Partly that is because the world's supply of "scrap" gold is shrinking. According to World Gold Council data, the supply of scrap gold fell 6 percent in the first quarter of this year, its lowest level since the third quarter of 2009.
Then there are non-government buyers. Chinese customers, for example, are expected to buy 5 percent more gold for jewelry this year than they did last year. That's significant because jewelry demand from China and India account for half of global demand for gold.
Finally, the quality of gold ore being mined is falling and the cost of getting it out of the ground is rising. In other words, it costs more to get less. That means lower supply, which in turn drives up the price. Takeaway: the price of gold will rise.
3. U.S. and European leaders are no where near getting their act together.
You don't have to go to Tea Party blogs to understand that Washington's debt-ceiling imbroglio a) amounted to kicking the can down the road and b) stripped away whatever vestige of credibility the ruling class had wrapped itself in. Fact is, there just aren't any grownups in the room. Federal Reserve Chairman Ben Bernanke can paper over the problem of a catatonic economy and huge fiscal deficit, but not forever.
And then there's Europe. With every fresh EU initiative to stop the Greek contagion it becomes more and more clear there are only two options. Either the weak members pull out or the European Union becomes an authentically singular fiscal entity. With Nicolas Sarkozy and Angela Merkel in the driver's seat, it will be a while before it becomes clear which way Europe will go. Trans-Atlantic angst over sovereign debt is not going away any time soon. Takeaway: the price of gold will rise.
Now here's a fourth reason, at no extra charge. Barclays Capital says gold will top $2,000 next year. Takeaway: buy gold.