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By Jeremy Glaser and Joung Park, CFA | 09-04-2012 11:00 AM

Should Gold Investors Head for the Hills?

Slowing demand has pushed gold prices down during the past year, but good exposure to the commodity can be had through several growth-oriented names.

Jeremy Glaser: For Morningstar, I am Jeremy Glaser. Gold is almost always in investors' focus. I am here with Joung Park, an equity analyst at Morningstar, to see what's happening with gold prices and the best way for investors to play it.

Joung, thanks for joining me today.

Joung Park: Thanks for having me, Jeremy.

Glaser: So, let's start briefly by taking a look at where gold prices have been recently. Certainly gold is seen as a safe haven. We've had plenty of financial worries recently. Has that played out in the price of gold?

Park: Yes. Even with recent worries, you have seen gold prices actually head lower over the past 12 months. The price is down more than 10% or so, and much of that's driven by weaker exchange-traded fund and jewelry demand. You have to remember that inflows into ETFs were what was really driving gold prices higher, and those inflows have slowed to a trickle. Also you've seen jewelry demand kind of ebb, and I think part of that is due to the Indian rupee really losing ground against other major currencies and making gold for Indian consumers much more expensive. And you've seen India, which really is the largest jewelry consumer for gold, kind of taken out of the picture, and that's really impacted the global demand for gold.

Glaser: If gold prices come back a little bit, do you expect over the long term that prices will come back to where they were before? What do you think the price of gold looks like into the future?

Park: I think that over the near term gold prices could head higher, and if they do, it will be because central banks are really ramping up their purchases of gold. You've seen central bank demand for gold really kind of help to stabilize gold prices, despite the weaker ETF and jewelry demand. And if these central banks in China, India, other emerging countries, and even Europe, start to really ratchet up their purchases in a major way, that could really impact prices, given that these guys are really the 800-pound gorillas in the gold market compared with regular consumers like you and me.

Over the long term, we still think that gold prices will head lower to our forecast of $1,200 per ounce, and the major reason for this is that gold is a commodity that's not consumed and there are already huge above-ground stockpiles. So, if you add up all the central bank holdings of gold, that already equates to more than 11 years of annual mine supply. Since gold does not spoil or tarnish or is consumed, as you purchase more gold, your stockpile just gets bigger and bigger, and at some point, when your stockpile is so big, I mean, there is less need for you to accumulate even more gold.

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