The macroeconomic environment in 2012 is marked by uncertainty, volatility and heightened anxiety. The EU will have to choose between printing money or facing a recession; American politics remains difficult, and growth in China and India has slumped.
Gold prices hit six-month lows in December 2011 as they came under pressure from investors and banks seeking cash and weak physical demand from China. Since then, they have steadily recovered but remained below the 200-day moving average of $1,634. However, yesterday (10/01/2012) gold finally broke through this barrier, suggesting that gold may now pick up some momentum and start to rise more steadily.
Murenbeeld, chief economist at Dundee Wealth Economics, sees the monetary easing (or quantitative easing) as the key bullish factor for gold prices. If Europe wants to avoid a recession, it may need to launch a version of quantitative easing; If this happens, there is no telling where the price of gold 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, in turn, would be good for gold.
Despite the recent slowdown in China, demand for gold remains strong thanks to rising wealth, inflation fears, easing of monetary policy and of course the approaching Chinese New Year. However, if the Chinese economy sinks into recession, gold prices could be dragged lower.
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, sell-off and disappointing physical demand for gold. emerging markets. Barclays forecast an average of $1,875 and Deutsche Bank cut its average forecast to $1,825. However, all of these adjusted forecasts can still be seen as bullish considering the current price of gold around $1,630.
According to the annual survey of industry predictions conducted by the London Bullion Market Association (LBMA), 23 of the largest bullion banks have forecast that gold prices will surpass the high of $1,920 reached in 2011 and could exceed $2,000 in 2012.
Negative real interest rates and central bank gold buying will continue to support the appeal of buying gold. The amount of physical gold available is shrinking, thanks to demand from emerging economies and hoarding by central banks. As a result, increased investor demand is likely to lead to a long-term trend of higher gold prices, causing the average to rise over the next several years.
Gold prices are likely to be as volatile this year 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 in the past and now gold has shaken off year-end losses and is gearing up for another bull run, so if you haven’t already, this may be the perfect time to invest in gold.