Gold enjoyed a strong performance in 2011. Although there were some steep declines, gold outperformed global stock markets and proved to be a solid, reliable, investment. Analysts believe that 2012 will be another good year for the metal, although this may not include completely smooth sailing. Here, we will look at the outlook for gold in 2012.
The forecast for gold has divided analysts. Goldman Sachs has lowered its forecasts, while Commerzbank expects prices to rise sharply. Verdmont Capital SA believes the recovering US economy will increase demand for metals including gold. BNP Paribas remains cautious, trimming its 2012 gold price forecast. Let’s look at the arguments for both:
Gold to rise in 2012
Improved US Economy
The recovering US economy should increase demand for metals such as gold. Lower unemployment, increased spending, and higher manufacturing production should boost prospects for the metal. “Indicators of spending, production, and job-market activity have shown some signs of improvement,” Federal Reserve Chairman Ben S. Bernanke said on February 2nd.
Bernanke’s comments were well-received among metal traders and gold prices reached a two month high, gaining 0.6 percent to settle at $1,759.30 an ounce on the Comex in New York that day.
“When economic news comes in better than expected, it boosts commodities, including gold,” Scott Gardner, the chief investment officer at Verdmont Capital SA in Panama, said in an e-mail to Bloomberg.
BNP Paribas precious metals analyst Anne-Laure Tremblay believes that strong demand from Asia, especially China and India, will benefit gold prices, she said in a recent report. If the global economy starts to recover in 2012, this will boost demand further. Only time will tell, though, and the investment bank believes gold will only reach $1,950 an ounce this year.
Increased Demand from Central Banks
Goldman Sachs, Commerzbank and BNP Paribas believe that increased demand from central banks, especially those in developing nations, is one of reasons which will push gold’s price forward in 2012.
Commerzbank said in a recent note: “Continued growth in investment demand and new interest from central banks, coupled with only gradual expansion of supply in our view, guide the price of gold back to its long-term uptrend.”
The German bank expects gold to reach $1,900 an ounce by the end of 2012. It believes that gold prices will average $1,600/oz, $1,650/oz and $1,750/oz in the first three quarters.
Increased Demand from Pension Funds
Nick Barisheff, CEO at Bullion Management Group Inc, believes that gold prices will rise this year because of increased investment from pension and insurance funds. He said recently,”…the real game changers will be the pension funds and insurance funds, which at this point hold only 0.3 percent of their vast assets in gold and mining shares.” Growing losses and pension deficits may force them to invest some of their portfolio into more stable investments like gold.
Gold to fall in 2012
Let’s look at some of the reasons why gold might fall in value in 2012:
Offsetting Investment Losses
Anne Laure-Tremblay believes that gold might be sold to offset investment losses made elsewhere. “In the shorter term, another episode of extreme risk aversion could potentially see gold correct further from its current levels as its sales offset losses in other asset classes,” she said in a recent report.
The UK is expected to enter recession later this year, and if other countries follow, it could tip the global economy back into recession. Demand for gold and other metals could be significantly reduced if this happens.
Reduced Government Debt
The price of gold tracks government debt closely. As the deficit increases, so does the price of gold. If governments reduce their debt and the purchasing power of their currencies increases, central banks around the world will reduce their dependency on gold to back their currency. This will see gold prices decline.
Gold prices should rise in 2012 thanks to the recovering US economy. Coupled with increased demand for gold in Asia and from central banks, gold will comfortably pass the highs of 2011.