Even without any sign of inflation on the horizon, investors’ love affair with gold continues, with some of the world’s most respected hedge funds falling under the precious metal’s spell.

Big-name investors that include George Soros and John Paulson appear to have acquired a substantial appetite for bullion this year, using the SPDR Gold Shares exchange-traded fund (GLD-N121.030.670.56%) to increase their holdings.

In recent filings, Soros Fund Management reported that the gold ETF comprised almost 13 per cent of the firm’s equities as of June 30, up from just 7 per cent at the end of the first quarter. As part of the reshuffle, the fund reduced its holdings of big U.S. income-producing stocks, including Verizon Communications Inc., Wal-Mart Stores Inc. and Pfizer Inc. It said that it had substantially cut its holdings of company stocks, to $5.1-billion (U.S.) as of June 30, down 42 per cent from $8.8-billion at the end of March. The SPDR Gold ETF was the firm’s largest holding at the end of the second quarter, worth about $600-million.

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Eton Park Capital Management LP revealed that it holds a stake of about $800-million in the same gold ETF, which is backed by some 1,300 tonnes of gold. Meanwhile, Paulson & Co.’s holdings in the gold ETF were largely unchanged and valued at nearly $4-billion.

There is some speculation that because prominent hedge fund investors are now pouring cash into gold, other institutional investors will follow, driving up the price and setting the stage for a massive correction.

The introduction of exchange-traded funds dedicated to bullion six years ago has made it much easier for investors of all skill levels to incorporate gold into their asset allocation strategies, and concerns about sovereign debt, volatile currencies and excessive government stimulus have raised the value of gold as a perceived safe haven.

In fact, as the recession and sluggish recovery have significantly reduced demand for gold in the traditional jewellery market, investor demand has offset that shortfall, says Tanya Jakusconek, an analyst with National Bank Financial Inc. She and her colleague, Tara Hassan, have just revised their forecast for the price of gold upward for the next five years, noting “continued strength in investment demand.”

Among the likely price drivers ahead are higher inflation expectations in response to the amount of global government stimulus and flat-to-declining mine output because of lower grades of gold being mined, Ms. Jakusconek wrote in a note published Tuesday. In addition, many of the world’s largest central banks are abiding by a five-year “concerted” program of sales agreement reached last year. Under the arrangement, annual sales are not to exceed 400 tonnes and total sales are not to exceed 2,000 tonnes.

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Russia, the Philippines and Venezuela have actually been buying gold for their central bank holdings. China, meanwhile, which is the world’s largest gold producer delivering 300 tonnes a year, has been consuming its production, Ms. Jakusconek said.

As a result, National Bank has increased its forecast for the price of an ounce of gold this year to $1,200, up from $1,150, and to $1,300 next year, up from $1,200. Those figures are slightly more than the average consensus of major financial institutions compiled by Thomson Financial. But the National Bank analysts expect that the price of gold will decline faster than the consensus estimate. By 2014, they expect gold to sell at $950 an ounce, compared with the average consensus of $1,016 an ounce.

On Tuesday, gold futures for December delivery increased $4.90, or 0.4 per cent, to $1,233.40 an ounce in New York.