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Based on analysts’ forecasts many investors were expecting 2012 to be another strong year for gold. But looking at the market recently may cause some investors to wonder if the professionals got it right.
By Michelle Smith – Exclusive to Gold Investing News
Following an 11-year bull run for gold in 2011, market watchers anticipated that 2012 would be another year of gains for the yellow metal gains. But three months into the year and gold has been taking some hits, rattling investors and begging the question: are analysts’ forecasts right?
2012 gold prices forecasts covered a wide range of prices with some analysts projecting highs over $2,000/oz. For the most part, analysts were bullish on the yellow metal and many investors undoubtedly looked to their predictions for guidance and reassurance.
We are now seeing weakness in the gold market. There has been a sharp decline in gold prices and according to some market speculators, there is the possibility for a further correction. If the price dips below certain technical levels, investors are warned that the door could be opened for a much sharper price decline.
But does this mean that analysts got it wrong and the bull run is over?
Investors should be aware that the gold market can render shocks and surprises like any other. Despite their optimism, analysts did warn that this year was likely to be another bumpy ride, especially early on.
The macroeconomic picture is so complex and some of the pending issues are so unprecedented that forecasting has become a much more challenging task, even for those who may consider themselves market veterans. As a result, investors may see some adjustments to the details surrounding analysts’ forecasts, but it is also likely that many of the those analysts will maintain a positive outlook.
Such was the case for three major banks—Barclays, HSBC, and OCBC–who lowered their forecasts shortly after the new year but noted that they remain bullish on gold.
Emerging markets
HSBC’s chief commodity analyst, Jim Steel announced a revised 2012 gold forecast of $1,850, down from $2,025. Among the reasons given for the change was lackluster demand from emerging markets.
For some time now, there have been warnings that hot emerging markets are cooling off and the suggestions are becoming more difficult to dismiss.
This week opened with China announcing their largest trade deficit in over 20 years. The news came on the heels of last week’s announcement of a lower annual growth target.
In a market note on Monday, Jon Nadler, Senior Metals Analysts for Kitco, wrote that India also reported a trade deficit in February.
“Also, do recall”, he said, “that there were recent reports concerning the fact that gold imports in India were one of the noteworthy contributors to the country’s current account deficit.”
Economic conditions
It’s now clear that going into 2012, much of the bullishness in the gold market was supported by expectations of another round of monetary easing from the Federal Reserve. The disappointment that has been witnessed from the lack of such announcement has weighed heavily on the market.
In its most recent weekly report, Standard Bank says the latest Commodity Futures Trading Commission data shows that net speculative length for COMEX gold was dealt a severe blow falling 159.2 tons—a 12 month record. Enthusiasm for gold ETFs is also fading.
Still Standard Bank maintains that gold will reach new highs in 2012, probably towards Q3.
Bullish factors for gold
While investors often trade on news and data that in many cases produce short-term effects, professionals often remain focused on the broader picture. Analysts are still aware that some of the strongest support for a bullish gold market remain.
For example, in the US, there is at least one long-term condition that is highly supportive of gold– low interest rates.
Goldman Sachs recently reaffirmed its positive outlook on gold, announcing that it still expects the metal to reach $1,940 this year. The firm has repeatedly pointed to low US interest rates as a main driver for gold prices.
Governments are still piling on the debt without clear and proven strategies for whittling it away. Important economies are projected to experience slowing or sluggish growth. Meanwhile distrust of fiat currencies is growing and putting one’s money in the bank in many countries continues to offer little or no rewards.
Recent developments in the Greece debt crisis should not mislead anyone into thinking that the turmoil in that country or the rest of the Eurozone is ironed out. The economic problems in that region continue to be a positive driver for gold.
Investors may want to remember the words of VTB Capital analyst Andrey Kryuchenkov who said, there is little alternative to gold in times of economic uncertainty despite the recent rush to the dollar.
Where analysts stand
HSBC has reaffirmed its prediction of $1,850, citing accommodative global monetary policies and investor jitters about financial markets.
Morgan Stanley remains bullish on the metal noting that the gold market has four pillars of support. These include the decline in producer hedging and the inability of miners to materially increase supply. Also, financial turmoil is expected to provide a pillar in the form of investor demand and another in the form of central bank gold buying.
While there have been some disappointing developments and will likely be more ahead, especially for headline-driven investors, the professionals’ are maintaining a predominately positive outlook for gold.
Those who played the gold market last year have hopefully gained a stronger stomach for the metal’s volatility. Those that read our 2012 Gold Outlook hopefully remember that though gains are expected this year, we were forewarned that they would likely be more modest gains than in the past and best earned from playing the game long.
