The macroeconomic environment in 2012 is set for uncertainty, volatility and heightened anxiety. The EU will have to choose whether to print money or face a recession; US politics remain difficult and China and India’s growth has slumped.
Gold prices hit six-month lows in December 2011 when they came under pressure from investors and banks seeking cash and weak physical demand from China. Since then they have steadily recovered but hovered below the 200-day moving average of $1,634. However yesterday (10/01/2012) gold finally broke this barrier which suggests gold may now gather some momentum and begin rising more steadily.
Murenbeeld, Chief Economist at Dundee Wealth Economics, sees monetary relation (or Quantitative Easing) as the key bullish factor for gold prices. If Europe is to avoid a recession it may well be required to launch a version of quantitative easing, if this happens, there is no telling where the gold price will end up.
In the short-term, the strength of the US Dollar is the most limiting factor for gold prices., However, it is fundamentally overvalued and as such Congress could force a ‘devaluation’ which would in turn be good for gold.
Despite the recent slowdown in China, demand for gold remains strong thanks to rising wealth, inflation fears, easing monetary policy and of course the approaching Chinese New Year. However, if the Chinese economy does sink into a recession, gold prices could be dragged down.
Most banks have lowered their gold price predictions for 2012. HSBC’s chief commodity analyst, James Steel, changed his forecast to $1,850 based on a weak Euro, liquidation and disappointing physical demand from emerging markets. Barclays forecast an average of $1,875 and Deutcsche Bank cut its average forecast to $1,825. However, all of these adjusted forecasts can still be viewed as bullish considering the current price of gold around $1,630.
According to the annual survey of industry predictions by the London Bullion Market Association (LBMA), 23 of the largest bullion banks have predicted that gold prices will surpass the high of $1,920 touched in 2011 and may well exceed $2,000 in 2012.
Negative real interest rates and gold purchasing from central banks will continue to support the appeal of buying gold. The amount of physical gold available is shrinking, thanks to demand from emerging economies and accumulation by central banks. As a result increased demand from investors will likely lead to a long-term trend of higher gold prices, causing a rising average over the next few years.
This year gold prices are likely to be as volatile as they were in 2011 with big gains, often followed by declines that may lead investors to doubt gold’s asset class. Gold bears may have been everywhere towards the end of 2011 predicting lows of $1,000 or less, but they were wrong just like they have been in the past and now gold has shaken off year end loses and is preparing for another bull run, so if you haven’t already this may be the perfect time to invest in gold.