2012 Gold Q1 Market Trends and Outlook

Gold prices were down nearly 2.5 percent in March, but still ended 2012′s first quarter (Q1) up over 6 percent. The monthly decline versus the quarterly gain highlights the change in sentiment that occurred during the quarter, and suggests that gold may have trouble regaining its momentum in Q2.

By the end of January, gold was up ten percent. Sharps Pixley said gold may be set to reach fresh highs this year much earlier than many might have expected.

In its two-month run up, gold prices broke $1,790. By leap day, it  was evident how largely macroeconomics, especially US monetary policy, had factored into investors’ bullish outlook. On February 29, the metal saw a sharp correction and prices rapidly fell over $100.

Macroeconomic pressure

This price decline was most heavily blamed on US Federal Reserve Chairman Ben Bernanke, who failed to announce further quantitative easing (QE). More QE would have injected liquidity into the US economy and supported inflationary fears, both of which are bullish for gold.

Q1 revealed just how prominent a role the Fed plays in the gold market. Investors were very pleased when it was announced that US interest rates would likely remain low until 2014. However, the lack of further QE was a severe disappointment, and investors continue to try to read into Fed statements for an indication of whether or not more QE will be forthcoming.

Further, there is a continuing flow of data from the US that supports a positive outlook for the economy. That improvement puts further pressure on gold because it places the metal in competition with the dollar for safe haven cash.

The EU debt crisis was another star player on the gold market’s macroeconomic watch list, and at the moment that region is not playing in the metal’s favor. Safe haven buying was largely driven by concerns of contagion. Instead, Greece has again been bailed out and banks were supported by way of another long-term refinancing operation. For now, that region’s risks appear contained.

As a result, there is less need for the safe haven of gold at this point, according to analyst Daniel Smith of Standard Chartered.

India protests

To aggravate matters, the world’s largest gold consumer is threatening the market with a potentially sharp decline in demand. India’s jewelers and bullion dealers embarked on gold protests last month in response to a budget proposal to raise taxes on the metal.

The curtains closed on Q1 without certainty of what effect, if any, the gold protests will have on the budget measures being approved and how the final outcome will affect the overall market. However, taxes on gold were already increased earlier in Q1. The Indian government recognizes gold imports as a major factor in its current account deficit, and has expressed intentions to take action to limit demand.

Going into the Q2, the unrest still appears to have significant momentum, and has reportedly turned violent in some areas. Gold imports in the March quarter are estimated to have fallen by as much as 55 percent to 125 to 150 tonnes.

Changing sentiment and outlook

Gold is struggling to regain its early-year momentum. Given the change in circumstances upon which many had based their predictions, some firms have changed their outlook for gold, either for the near term or for the year.

Scotiabank said that in recent months its reasons for being bullish for gold have revolved around currency debasement, concerns over contagion from the EU debt crisis, the threat of deflation, and healthy investor demand.

However, in its March report, the bank said prices may have run ahead of themselves. “We remain bullish for bullion over the medium term, but it might now take another crisis to unfold, or the the onset of inflation, to send gold back above $1,800/oz [a resistance level],” said Scotiabank.

Citing the increased appearance of sustainability for US economic recovery, UBS too has lowered its forecast. The bank reduced its year average price from $2,050 to $1,680.

Barclay’s, HSBC, and OCBC adjusted their predictions early on. Since then, TD Securities and Deutsche Bank have also announced a dimmer forecast.

Many of the these firms say that they are still bullish on gold, especially for the long term. ETF investors also appear to have remained largely supportive of the metal. Though some selling was seen in March, ETF demand for the quarter resulted in a gain of 1.5 million ounces.

Securities Disclosure: I, Michelle Smith, do not have equity interest in any of the companies mentioned in this article.