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Gold is not just a lunatic fringe investment

September 25, 2012: 12:53 PM ET

The gold rush may seem foolish to some. But with central banks around the world in easing mode, the metal still has some luster.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.

Gold is often derisively referred to as an investment that only kooks who are preparing for the end of the world in a bunker can love. But it might be time to stop with all the gold bashing.

Sure, plans to return to the gold standard may still seem a bit extreme. (Sorry Ron Paul and your loyal minions!) Yet if you look at the reason why gold has done so well lately, it seems logical to expect the price of the yellow metal could continue to climb, blow past its current all-time high (not adjusted for inflation) of about $1,923 an ounce and surpass $2,000 in the process.

Gold is hovering around $1,770 right now. The price has risen more than 12% since the beginning of the year and is up 6.5% in the past month alone. Gold's rally first started to pick up steam a few weeks ago, on the back of the European Central Bank's plan to buy up bonds of troubled sovereign nations.

The Federal Reserve followed the ECB's lead and launched QE3 just a week later. Central banks in Japan and England are also in easing mode and with China's economy slowing, it would not be a huge shock if the People's Bank of China were to soon announce its third interest rate cut of the year.

Add all that up and it's very bullish for gold. Central banks printing money like there's no tomorrow ultimately should lead to lower values for the currencies of countries in easing cycles, as well as inflation. And inflation is gold's best friend.

"I am not a gold bug. But I think gold can go much higher. There is not a number for the price of gold you can give that would shock me," said Ron Carson, founder and CEO of Carson Wealth Management Group in Omaha. "If the Fed and other central banks continue to pile on more debt, commodity prices will go through the roof."

Carson, who owns gold miner Goldcorp (GG) as well as the iShares MSCI Global Gold Miners (RING) exchange-traded fund of gold miners, says that investors should have some exposure to the metal in their portfolios. But they should not overdo it. He thinks a 10% allocation, split between the actual commodity and shares of miners, makes sense.

Rob Lutts, President of Cabot Money Management in Salem, Mass., agreed. He said he's advising clients to have about 10% to 12% of their portfolios in gold assets. He recommends the SPDR Gold Shares ETF (GLD), which invests in gold bullion, as well as gold miner Barrick Gold (ABX) and the Market Vectors Gold Miners ETF (GDX).

Lutts said that the biggest mistake some investors make when they dismiss gold is forgetting that it will take central bankers many years to fix the world's numerous monetary problems.  And as long as banks are easing, that's a plus for gold.

"When I first started recommending gold at $400 an ounce people thought it may just go to $1,000," Lutts said. "But what's changed in the past few years is the notion of how temporary all this easing is."

To that end, economists at Goldman Sachs recently predicted that the Fed's QE3 program could ultimately hit a price tag of $2 trillion and last until 2015.  Lutts added that the amount of money the ECB will have to spend on Greece, Spain and other countries should be "significant and still unknown."

Related: Why Warren Buffett may be wrong on gold

Of course, investors always have to be wary of chasing performance. But it's also not smart to simply conclude that because an asset has already increased in value, it must go down sharply in quick fashion.

Apple (AAPL) started its miraculous bull run about a decade ago with the stock in the single digits on a split-adjusted basis. Any investor who thought that Apple must have topped at $50, $100, $200, $300, $400, $500 or $600 has been proven horribly wrong. The stock is now trading near $700.

Now I'm not trying to suggest that gold is the new Apple. Gold, after all, is an asset that doesn't produce anything. Its value stems more from supply and demand as opposed to earnings power. But gold could also benefit in the next few years from continued strong demand from China, India and other emerging markets. For many investors, gold is not just an inflation hedge/alternative currency play. Lutts thinks gold could hit $3,000 over the next three to five years.

"More institutional investors may come on board and drive gold even higher," he said.

A $3,000 target price for gold may sound like a crackpot prediction at first. But many scoffed at gold $750, gold $1,000 and gold $1,500 prognostications not that long ago. Unless the economy suddenly takes a turn for the better, or central banks decide they can't continue to support the financial markets with easing ad infinitum, gold may keep climbing.

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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