Gold tops $1,500 before pulling back

By Alix Steel, TheStreet

Updated at 3:08 p.m. ET

Gold prices topped $1,500 an ounce Wednesday as the U.S. dollar sank and as some experts said the recent rally will be short-lived.

Gold gained $3.80 Wednesday, hitting a new intraday high of $1,506.20 before falling back to settle at $1,498.90. Silver settled up 55 cents to $44.46 an ounce after reaching a new 31-year high of $45.40 an ounce. Silver's all-time high is $49.45. Copper added 11 cents to close at $4.34 a pound.

Gold has surpassed many analysts' expectations for 2011. Brian Hicks, co-manager of the U.S. Global Investors Global Resources Fund, is increasing his 18-month price target to $2,000 and thinks silver will go to $100.

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"I think it's clear that we are in a bull market," Hicks says. "Gold and silver still have not surpassed their inflation-adjusted highs like so many of the other commodities have. Gold and silver are still extremely small markets."

As gold and silver catch on as must-have investments, prices will rise, according to Nick Barisheff, the CEO of Bullion Management Group."I think we are starting to move (into a phase where) we are getting institutional involvement." Barisheff points to the fact that the University of Texas Investment Management, one of the largest pension funds, is taking delivery of 6,643 gold bars.

Barisheff says there is only $6 trillion in above-ground supply of gold, with $3 trillion of it being bullion. Out of the $3 trillion, half is in central bank vaults and the other half is in private hands. Financial assets are worth $200 trillion, not counting derivatives and real estate, so any movement out of that $200 trillion and into the privately held $1.5 trillion of gold bullion would be huge. "The only thing that can adjust is the price."

"At a minimum, the quickening shift to physically allocated gold proves the long-term intent of the institutions involved," argues Adrian Ash, the head of research at BullionVault.com. "David Einhorn's Greenlight Capital made the move two years ago. It's since saved his clients at least $3.2 million in fees."

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Nevertheless, record high prices are making some traders jittery. Scott Redler, the chief strategic officer at T3live.com, is selling some of his gold position, and David Banister, the chief investment strategist at ActiveTradingPartner​s.com, says, "I would probably be looking to trim some of my positions."

Banister believes gold could rally to between $1,525 and $1,550 before seeing a meaningful correction to $1,300. Banister, however, does think that gold could still hit $1,750 to $2,000 in the next few years.

On the other hand, Will Rhind, the head of U.S. operations for ETF Securities, has not seen any profit taking or price sensitivity from gold buyers but is noticing more diversification. "What we are noticing is a very clear trend: People are starting to diversify exposure through the baskets such as ETFS Physical PM Basket (GLTR) and ETFS Physical WM Basket (WITE)."

GLTR is a mix of gold, silver, platinum and palladium, although gold is the dominant metal, whereas WITE is purely silver, platinum and palladium. "We're certainly seeing less single metal plays. . . .  You've got to be quite a conviction player to purchase gold at these levels."

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Despite an increase in risk appetite and a triple-digit rally in stocks, gold is still benefiting from a weak U.S. dollar. The U.S. dollar index was falling 0.8% to $74.43, as it has had a tough time recovering from Monday's S&P downgrade of the U.S. economy. The dollar's strength will hinge on whether Congress can pass a meaningful 2012 budget and get its fiscal house in order.

The fragility of currencies has been on display in Asia as well with emerging markets reportedly buying dollars to help suppress the rapid rise of local currencies. This comes as China is taking steps to dethrone the dollar as the world reserve currency. China is trying to make it easier to bring the yuan back into the country and to do business in the currency without converting it into dollars.

China, along with the Federal Reserve, is the largest holder of U.S. debt and doesn't want the currency to tank on the international stage. But China has been taking steps to beef up its own global presence.

Gold typically reacts well when currency fluctuations are in the spotlight, as it underscores gold's stability as safe money.

Gold mining stocks, a risky but sometimes more profitable way to invest in gold, were rallying Wednesday. Barrick Gold (ABX) was adding 1.3% at $54.93, Newmont Mining (NEM) was gaining 0.6% to $58.98, and AngloGold Ashanti (AU) was climbing 1.4% to $49.70.

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