Gold Blog

Gold 2012 – gold price trend

January 04, 2012

2012 promises to be a turbulent year for investors. The forecasts of price trends of all asset classes, however, are to be treated with great caution. For the price of gold in 2012, there is under various scenarios a positive outlook and a broad diversification remains key for any safety-orientated investment strategy.

Review of Gold 2011

In 2011, despite fluctuations, the rise in the price of gold has been overall positive for investors.

While gold in 2011 has risen from early 2011 until end of December 2011 by just under 8% of its value, there was from mid-September to mid-October also a significant drop by 16% from the interim high of USD$ 1,900 (€ 1375) to USD$ 1,600 (€ 1,176). From this low point, the gold price rapidly recovered by about 8%, but the price of gold fell again in December closing at USD$ 1,534 (€ 1,185) at the end of the year 2011. At the end of 2011 gold was 8% higher as at the beginning of the year. Only since the beginning of 2012 the price of gold is rising again.

For many analysts, besides the fear of overvaluation of the gold price, the main causes for the interim price declines of gold in 2011 were the following: multiple increases in margin requirements for trading in gold, profit-taking and declines in other asset classes, e.g. stocks. Declines in other asset classes would have forced institutional investors such as funds to sell assets like gold which has performed very well to compensate losses and to raise cash for margin calls or to meet redemption requests. Some analysts also blame the bankruptcy of MF Global which would have forced many institutional investors to liquidate commodities futures contracts, including gold.

As a possible cause for the decline in gold in December 2011 many analysts refer to tax purposes and the fact that many fund managers sell assets which performed well to lock in gains for the year and dress up quarterly reports.

Gold in 2012

In 2012 the gold price will be determined by the supply of and the demand for gold. The supply of gold is determined by the gold mining by mining companies, the recycling of gold, and the possible sale of gold by central banks.

The demand for gold is composed of three building blocks: Gold for technological applications (particularly in dentistry and electronics), gold in jewelry and gold as an investment product.

The demand/ supply of gold by central banks could also be considered on the demand side. Since the central banks were until recently net sellers of gold, the supply or demand appears regularly on the supply side, even though central banks have bought in 2011 more gold in total than they have sold.

Gold supply

According to the World Gold Council, the identifiable supply of gold increased in the 3rd Quarter of 2011 by 2% over the level of the previous year. Gold production from gold mines increased by 5%, the recycling of old gold increased by 13% over the previous year. The supply of gold rose by a total of only 2% as central banks continued to buy more gold than to sell – to an increasing amount. After many years in which the central banks sold gold, this trend turned around for the first time in 2010 and has accelerated in 2011.

Gold demand

According to the World Gold Council, total supply of gold increased in the third quarter of 2011 by 2% compared with a 6% rise in identifiable demand for gold. In the third quarter of 2011, about 44% of the available gold supply went to jewelry-making and investment, respectively. The remaining 11% went into technology.

Compared to 2010, demand for gold for jewelry production fell by 10% in the third quarter of 2011. The main reason for this may be the rising gold price resulting in more expensive gold jewelry. By contrast, the demand for gold as an investment increased by a whopping 33%, despite the fact that – in addition to any profit-taking – some institutional investors probably had to sell their gold to offset losses in other asset classes like stocks. In our view, it is also likely that part of the jewelry gold is rather seen as an investment asset than as jewelry: In the Middle East and countries like India, gold jewelry is often sold at very low premiums above the material value and is in fact often considered as an investment asset and used accordingly.

The total demand for gold in the technology and dental sectors remained nearly constant throughout the previous year.

Predictions regarding supply and demand for gold 2012

What are the expectations regarding gold for 2012? Supply from the gold mines generally changes only little in the short term. In the supply of scrap gold, i.e. recycled gold, major changes are possible in the short term, for example if owners of jewelry or investment gold expect a decline in gold prices and react by selling gold. According to this, however, supply of gold would again depend on the expectations regarding the price of gold 2012.

Thus, the question is what the main drivers of gold demand in 2012 are. Can we predict them? The demand for gold for jewelry making depends fundamentally, and thus also for 2012, on the gold price. Another factor for jewelry demand besides the price level of gold is the economic development, or the question whether consumers have money to purchase jewelry and want to spend it on jewelry.

In comparison with demand for gold jewelry, investment demand is subject to entirely different factors: investment gold is seen by many investors rather as a means for hedging than for speculation – namely as a hedge against financial or currency crises or as a hedge against inflation. For Western investors who buy gold for hedging purposes, the fear of high inflation or hyperinflation or of a currency reform are the main drivers for gold investments. However, for investors in the so-called ’emerging markets’ gold is often used as a hedge against high but not extremely high inflation rates – for instance, for many investors in Asian countries whose cash amounts steadily lose in value due to high inflation rates that are higher than the offered interest rates.

According to this, the demand for gold is subject to some conflicting factors: If the world economy is doing well, the expected inflation rates e.g. in China tend to be high, and so do investment demand in Asia and global jewelry demand. If, however, in 2012 there is a global economic crisis or the current financial crisis resurges, while jewelry demand for gold is likely to drop, investment demand, particularly from the Western world, could continue to rise. This is all the more likely as in such a scenario base interest rates will tend to be reduced and thus gold which bears no interest is becoming relatively more attractive as an investment asset. Moreover, in such a scenario even more programs to increase liquidity are likely to be initiated by governments. The funds created by such programs search for investment opportunities and this often leads to a rise in prices of various asset classes, including gold.

Scenarios for gold 2012

What scenario and accordingly which development of the gold price is thus to be expected for 2012? Unfortunately, the serious answer probably is that no one can correctly predict the development with high certainty. Both, an easing of the debt crisis and an improvement of the economic situation, as well as a further escalation of the crisis are possible in 2012.

In our view, there are strong arguments for another so-called ‘deleveraging’, ie a reduction of debt by States but also by banks and others. Such a debt reduction can be achieved on the part of governments only through savings and / or tax increases. For example, Greece, Italy and Ireland are currently making steps in that direction. And with regard to the banks a ‘deleveraging’ is also predicted, one reason among others would be to meet the increased capital requirements.

As useful as these steps probably will be in the long term, as damaging to the economy 2012 they can be in the short term. A possible consequence would be lower or negative economic growth beyond the acute crisis countries and, as a result, not inflationary but rather deflationary developments. However, in contrast to the commonly held opinion, the price of gold often performs well not only in times of high inflation, but the gold price regularly performs also very well in deflation and crisis scenarios. This could be a valid assumption for gold in 2012.

Analysts’ forecasts regarding the price of gold in 2012

Looking at the forecasts of various analysts to the gold price 2012, positive assessments obviously outweigh negative ones. Goldman Sachs confirmed at mid-November 2011 its prediction of a gold price of 1,930.- U.S. Dollars per ounce in twelve months, i.e. for end of 2012. Currently, as of January 4th, 2011, the gold price is about 1,600.- U.S. Dollars per ounce. Analysts polled by the information provider Bloomberg expect a gold price of 1,950.- U.S. dollars at the end of March 2012. Eight of the ten most successful gold analysts were interviewed and the average of their forecasts was taken.

Please check the most recent forecasts of the gold price.

Outlook for gold in 2012 and Implications for Investors

One finding of recent years, however, is that analysts are often wrong and good predictions in the past do not guarantee a high quality of current forecasts. This also applies to gold in 2012.

There is a strong argument for the prediction that 2012 could be very upsetting, and hence that the prices of various asset classes will vary greatly. For the conservative and safety-orientated investors, this means for 2012, a broad mix of assets should be key. In such a portfolio for 2012, gold should be able to continue defending its share.

Many investors will also view gold in 2012 primarily as an “insurance”. They would participate in a potentially positive economic development and a bull market in equities through stocks or mutual funds and they would be glad, if they would not have to rely on their “insurance”.

With vaulted gold / allocated gold accounts, investors looking to invest some of their money in gold can acquire outright ownership in physical gold without the usual hassles of physical gold investments and without any typical counterparty risk.

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