Analysts are unsure whether gold will see the performance in 2012 many forecasted for the metal prior to its lackluster finish last year. Much of the growth seen in 2011 was driven by incredible demand from India and China, much of which has fallen off as the two countries struggle to sustain skyrocketing growth. The drop-off in Asian demand is coupled with an increase and gold production and the possibility that central banks may start selling off gold stores to raise cash. Experts say corrections are normal and that gold has been increasing in value overall for the last 10 years, but investors may be growing weary of the supposed safe-haven investments volatility. For more on this continue reading the following article from TheStreet.
Can gold prices regain their luster in 2012?
Gold prices ended 2011 with a fizzle. Gold ended the year up 10%, but had fallen 18% from their intra-day high of $1,923 an ounce, leaving many investors and fund managers weary of the supposed safe haven asset. Gold was undoubtedly a confusing investment to many. It traded with risk assets, then traded in tandem with the euro, oil and stocks and inversely to the U.S. dollar.
Gold bears point to weakening physical demand out of Asia. China and India accounted for 41% of total gold consumed in 2010, according to the World Gold Council, but both countries are struggling to maintain their fast and furious growth.
India consumed only 878 tons of gold in 2011, a 8.4% drop from 2010. The Bombay Bullion Association believes that in the first quarter, India could import half of what it did in 2011. Indian demand has been ravaged by high interest rates and a devalued rupee, making gold more expensive to buy.
Demand in China is strong, but not enough to compensate for lackluster Indian demand, and many fear a slowdown if China’s economy also slows drastically. China’s inflation has moderated to 4.2% and the central bank has allowed banks to keep less money in their reserves, but seems reluctant to cut rates further.
To make matters worse, mine production was up 5% in the last quarter and there is a worry that central banks might start selling gold to raise dollars.
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On the flip side, the bulls point to 11 years of gold price gains and argue that gold’s recent massacre was a normal correction. Central bank buying has also been robust, with the official sector buying 344 tons of gold in the first 11 months of 2011. Turkey and Russia comprised the lion’s share of buying.
Finally, bulls take comfort in the fact that inflation is outpacing interest rates, leading to negative real interest rates in most countries. As people’s money in the bank is literally worth less, investors flock to a hard asset like gold to preserve their wealth. Many are expecting inflation to pick up speed as central banks around the world gear up to fight deflation with more money printing.
Jeffrey Wright, senior research analyst at Global Hunter Securities, sees gold range bound for the year between $1,450 and $1,750 an ounce. Wright says there could be spikes to $1,900 or $2,000, especially if gridlock in Congress brings up another budget battle and highlights the U.S.’ own fiscal problems. “I don’t think the bull market is over, but there is near term consolidation that could go on for six months or longer.”
Leo Larkin, metals and mining analyst at S&P Capital IQ, thinks that $1,900 gold might not be that much of a stretch. “Gold has been going up without interruption for 10 years” and a correction is totally normal, Larkin says.
“The United States’ [money] supply is up 9% from the beginning of the year and the monetary base is up 30%. They are setting the stage for higher [gold] prices,” argues Larkin.
“People get so caught up with the next three minutes for gold and they should really be focused on the next three years,” says Frank Holmes, CEO of U.S. Global Investors. “Does anyone really believe in the long term strength of the U.S. dollar … We’re just going to have to live with this volatility for another 12 months,” says Holmes, who still thinks gold price could double to $3,600 an ounce in 5 years.
Morgan Stanley has a current gold price forecast for 2012 of $2,200 an ounce based on more stimulus from central banks, in particular the Federal Reserve, as well as a normalization of gold lease rates. Gold lease rates had trended into negative territory, a 22 year low, as demand surged to use gold as collateral for U.S. dollar loans. As liquidity needs ease in Europe and as more European banks access the U.S. dollar swap line put in place by central banks, the pressure on gold may ease.
Barclays Capital thinks gold will average $1,875 an ounce in 2012, but could rally as high as $2,200 and fall as low as $1,400 an ounce, reflecting gold’s battle between a stronger U.S. dollar and soft physical buying versus strong investment demand and central bank buying. “Longer term, gold still possesses structural pillars of support in an environment of negative real interest rates and rising inflationary pressures.”
Bank of America/Merrill Lynch sees gold prices averaging $1,850 an ounce in 2012, with a high of $2,000 driven mainly by more quantitative easing from the Federal Reserve and European Central Bank. The firm expects $600 billion and 500 billion euros worth of new money to be pumped into the system, respectively. “We expect gold prices to rise by 16%, or $275, over the next 12 months.
James Steel, analyst at HSBC Securities, lowered his average gold price target to $1,850 from $2,025 an ounce, but Steel expects a wide trading range where gold could pop to $2,050. “Any shift in focus from the eurozone to the U.S. and its fiscal problems would be likely to benefit bullion,” wrote Steel in a note. However, deflation scares and deleveraging will limit gold’s rally.
Jon Nadler, senior analyst at Kitco.com, thinks gold prices will more likely see $1,000 an ounce before $2,000 an ounce. “The question will remain for 2012 to what extent will investment demand be able to remain the principle driver and continue to attract interest from speculators and investors,” a shaky prospect after last week’s carnage. Nadler thinks gold might need a significant period of consolidation, perhaps 2-3 years, to regroup.
Nadler is also watching gold ETF inflows, which he said were 50% lower in 2011 versus 2010. Nadler said that the gold ETFs — like the SPDR Gold Shares(GLD) and the iShares Gold Trust(IAU) — added 134 tons during the year versus 291 tons in the second quarter of 2010 and 465 tons in the first quarter of 2009.
This article was republished with permission from TheStreet.