April 21, 2011 / 8:58 PM / 6 years ago

Advisers warn of crash, but still buying gold

<p>Gold plates are displayed for the media inside a Bank of Taiwan branch outlet in Taipei April 21, 2011.Nicky Loh</p>

TORONTO (Reuters) - Investing in gold has been called a fool's game, but many financial advisers are adding to their positions in the increasingly costly asset as concerns about the fiscal messes in the United States and Europe mount.

Gold hit a record high above $1,500 an ounce for a fifth-consecutive session on Thursday, driven by a laundry list of factors, including inflationary pressures in some key economies, the lack of a clear plan to deal with the U.S. deficit, and the sovereign debt woes in Europe.

Everything, it seems, is going gold's way, and for Barry Schwartz, that sets off alarm bells.

Swartz, vice president and portfolio manager at Toronto-based wealth manager Baskin Financial Services, says the gold market has topped out, and now is the time to sell while there are still people willing to buy.

"It's a crowded trade filled with dumb people and they're going to get their heads handed to them," he said.

Looking back over more than 100 years, stocks have substantially outperformed gold, and for those looking for a hedge against inflation, more value can be found by buying companies that do well in inflationary environments, he said.

Still, there are a lot people that take a short- to medium-term view that gold is still a good bet.

Twelve analysts polled by Reuters said gold's decade-long bull run could continue for four more years, albeit at a slower pace, with the average price in 2015 seen at $1,700.

Steve Ayer, managing director and partner at HighTower's Strata Wealth Management group in suburban New York, started investing gold in late 2001, and has been doing so ever since.

He bought more GDX, GDXJ, and SIL -- exchange-traded funds that group gold- and silver-mining companies and are traded on the New York Stock Exchange -- on Monday after Standard and Poor's put the U.S.'s vaunted AAA credit rating on notice of possible future downgrade.

"There are cycles in which gold outperforms the market, and by a fairly dramatic amount, and we're in that cycle right now," Ayer said.

He sees gold hitting as high as $2,250 and expects the time to sell will be in six to 12 months.

John Stephenson, senior vice-president and portfolio manager at Toronto-based fund company First Asset, also bought more gold ETFs after the S&P revision to the U.S. credit outlook, buying GLD, which invests in the physical commodity.

He expects gold to reach as high as $2,000 within the next 12 to 24 months even though the price is not being driven by fundamentals.

"Yes, it is psychological, yes it is driven by investment flows -- I don't think there's any debate on that -- but in a world where the monetary unit of the biggest economy in the world is being systematically debased, I think that's why people will buy it," he said. "It'll crash, no question about it, it's just not going to crash any time soon."

The U.S. dollar has been languishing in the wake of the U.S. Federal Reserve's move to use quantitative easing -- basically printing money -- starting in late 2008 to stimulate the economy, racking up trillions in debt.

The greenback is sitting at a three-year low against a basket of currencies, and could take a run at the record low it hit in 2008.

"As long as the dollar remains weak, I think we'll see appreciation in gold," said Jeffrey Sica, president and chief investment officer at SICA Wealth Management in Morristown, New Jersey.

He pointed to growing demand for precious metals in both emerging and mature markets and expects gold to increase by another 20 percent to 25 percent over the medium term.

"The psychological value of precious metals right now has never been higher and I see nothing to reverse that trend," he said.

On Tuesday, his firm bought more of the precious metals ETFs SGOL, SIVR, PTLT, and PALL. Sica said he would continue to accumulate gold and the other precious metals until the U.S. government comes up with a viable solution to solve its deficit problem and as long as the U.S. dollar remains weak.

Even the University of Texas has caught the gold bug. It bought nearly $1 billion of gold bars, equal to about 5 percent of its assets, as a hedge against currencies and over concerns that there is excess monetary and fiscal stimulus in the economy.

"Gold and silver are both the canary and the coal mine in terms of financial distress, largely in the U.S. market," said First Asset's Stephenson.

($1=$0.95 Canadian)

Reporting by John McCrank; editing by Peter Galloway

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