5 reasons gold is headed to $1,500

Gold's much-heralded climb above $1,000 an ounce was pretty short-lived. Gold's long-term ascent won't be.

With gold now trading closer to $900, this is a great time to load up on more exposure to bullion, which is only taking a breather before heading to $1,500 an ounce and higher.

That's the view of two gold gurus who have been correctly calling bullish advances in the yellow metal for years, most recently predicting the move to $1,000 an ounce. That was in November, when it seemed like an audacious forecast.

With their forecast proved correct -- if briefly -- they're not backing off. "There is lot more upside for gold," says Thomas Winmill, who manages the Midas Fund (MIDSX), one of the top-performing precious metals funds, with a three-year average annual return of 41.6%. Winmill thinks gold could see $1,500 in 12 to 18 months.

Frank Holmes, who manages the second-best-performing gold fund this year, U.S. Global Investors Gold and Precious Metals Fund (USERX), sees bullion going to $1,500 to $2,000 an ounce in the next leg up. He's not offering a time frame for that target.

Like Winmill, Holmes is worth listening to because his precious metals fund is also consistently one of the top performers. His Gold and Precious Metals Fund is up 40.1% a year over the past three years. Their funds do 6 to 7 percentage points a year better than the average for their peers.

How gold goes 50% higher

Another way to go, of course, is to simply buy shares of their funds.

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Here's a look at why they think gold will see $1,500 within a year or so.

Reason No. 1: The dollar's value is declining. "Gold is attractive as a safe haven when the dollar is declining," says Holmes. But why will the greenback continue to weaken? Above all, the Federal Reserve has been slashing interest rates dramatically, and it may reduce them even more. This makes investors move money to other countries -- especially emerging-market economies that have higher interest rates and higher growth rates. As investors move away from U.S. assets, they sell the dollar and push it down. And they buy other currencies, pushing them up against the dollar.

Investors are also losing confidence in the U.S. economy and U.S.-based investments because of the growing federal deficit, the subprime mess and concerns about the Fed's new role in bailing out investment banks exposed to too much subprime debt.

Reason No. 2: More inflation on the way. To see where inflation is headed, just take a peek upstream in the production process, says Winmill. Prices on intermediate goods -- or stuff that is midway through production -- advanced 8.8% during the 12 months through the end of February. Prices on early-stage "crude" goods were up 24%, according to producer price index data released by the Bureau of Labor Statistics (BLS). "I see those price increases coming into the economy," says Winmill. "That is inflation in the pipeline." Prices on finished goods gained 6.4% in the same time frame.

Consumers, of course, are already aware that prices for food and gasoline have gone up. But as inflation persists, they'll hit a pivotal point in their thinking, when they switch to expecting prices to continue climbing. "That will trigger a psychology of investing in gold as a place to hang on in an inflationary environment," believes Winmill.

Video on MSN Money

The Tupperware-style gold party
With gold -- and economic anxiety -- at record highs, people are throwing 'gold parties' to sell off old jewelry.

Reason No. 3: Investors will seek greater safety. Inflation is already so high that investors are losing money in traditional "safe" investments like U.S. government bonds. Consumer prices are advancing by about 4% a year, according to the BLS, while two-year U.S. Treasury bonds are yielding around 1.6%. So investors who now buy two-year government bonds will be losing 2.4% of their money per year. If the Fed lowers rates even more and inflation advances, the negative returns on government bonds will only widen.

"Historically this has been very good for any kind of hard asset, and particularly gold," says Winmill. "In a negative interest rate environment you don't want to hold bonds because you lose purchasing power." Winmill sees plenty of room for a shift in the flow of investing dollars toward gold, because only a minuscule amount of money in managed accounts is dedicated to investments in commodities.

Meanwhile, people continue to lose lots of money on investments like real estate and debt instruments backed by subprime mortgages -- which will keep scaring them into buying perceived safe assets like gold. "There is massive deflation in real estate and financial assets, and gold has traditionally done well when there are concerns about deflation," says Holmes.

Continued: Two more reasons

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