GFMS: Gold Could Peak at $2,000 in 2013

Thomson Reuters GFMS has forecast a struggling gold market for much of 2012, but according to Philip Klapwijk, chairman of GFMS, gold could rise above $2,000 an ounce in 2013. However, that could be the high watermark for the market.

GFMS is looking for gold to trade between $1,530 and $1,920 in 2012 and to achieve an average price of $1,731.

This trading range may seem highly optimistic as it includes a high above that seen in September 2011, when gold rose to $1,921, especially given the current condition of the market. Gold is currently dwelling around $1,640 and is stubbornly resisting any encouraging upward moves.

Klapwijk cited softer demand in key physical markets and slackening investment appetite for bullion as contributing factors to the current weakness. He also pointed to a widening gap between rising supply from mining and recycling and falling demand for jewelry and other goods. Given those fundamentals, there could be a surplus north of $130 billion dollars, he projected.

That amount of excess supply requires a strong investment appetite if prices are to rally, but the market is not overly eager to take positions in gold at this point. Investors appear to be looking for a cue to provide some clarity as to what position they should take.

Standard Bank optimistic

Standard Bank recently reported that open interest in COMEX gold has reached a twelve-month low.

“Net speculative length remains relatively weak at 472.1 tonnes (compared to the 2011 average of 671.3 tonnes), which signals a continued lack of confidence,” it said.

But the report goes on to say, “while investors are not overtly bullish, the drop in short positions is somewhat encouraging as a sign that investors are cautious of running too short.”

Standard Bank observed similar sentiment among ETF investors, reporting that ETFs are still net sellers, but the modest nature of selling is once again a sign that investors do not have a particularly bearish view either.

A technical explanation

Those who prefer technical reasoning for the current weak performance in the gold market may find an explanation provided by Jordan Roy-Byrne, editor of the The Daily Gold Premium, to be helpful.

Roy-Burne believes we are currently in the midst of an inevitable correction, which is a period characterized by declining volatility, receding bullishness, and evaporation of interest.

The average true range (ATR) indicator, which measures volatility, hits lows prior to or soon after an impulsive advance. But this didn’t happen when the 2008 global crisis prompted a peak in volatility in the gold market. Instead, the metal embarked on a 25-month uncorrected advance in which prices rose from about $900 to $1,900.

A reality of the market, according to Roy-Byrne, is that a period of correction is needed to digest all major moves. And according to technical indicators, the correction that we are experiencing now should span 9.5, 12.5, or 15.5 months before the market reaches an important low.

These periods of correction, especially the latter two, closely coincide with GFMS’ prediction that gold prices will be weak in the short term, rising later in the year and going into 2013.

Market watchers largely agree that gold is likely to make a move, though many are unsure of which way it will go.

Gold’s $2,000 peak may not last 

GFMS sees a positive direction for gold as the prospect for US monetary easing gains ground and Eurozone crisis concerns persist. But although the company expects gold to be driven to $2,000, Klapwijk warns that the rise could be short-lived.

Its strong performance could be jeopardized if the noted drivers disappear and could be especially threatened by higher interest rates in the US.

Uncertainty a common theme

The World Gold Council (WGC) also views Europe as a positive driver. “Gold is a proven hedge against both strong asset devaluation and potential inflation, and both risks will remain prominent as euro area sovereign issues remain,” the council said in a recent report.

The WGC also acknowledges that many investors view US economic recovery as negative for gold due to the normalization of the real rate cycle. While the WGC agrees that there is a historical relationship between US real interest rates and gold prices, it contends that this relationship may be less significant in a “less US-centric world.”

As opposed to two or three decades ago, the WGC said that gold demand is now dispersed around the world with greater emphasis, particularly in countries like India and China.

However, Klapwijk specified India and China as two markets where weakness is being seen.

Such uncertainty and lack of clarity about what the market will do – and why – are primary reasons that many investors are stuck in neutral.

A soft landing for gold?

GFMS’ prediction that gold could reach its peak next year may conjure memories of the period last year when investors were worried about the gold bubble bursting. The concern was so prominent that market cognoscenti couldn’t escape it. As much of that fear has dissipated and the market hasn’t imploded, it may seem that those fears were overblown.

But, then again, perhaps investors, and even the advisors that they turned to, were looking for the wrong thing. The end of the bull run may not necessarily be the free-fall event that many people expect. The end of this bull market could be more closely likened to a deflating bubble than one that suddenly bursts.

The WGC said that Q1 2012 volatility measured 20.4 percent, which is higher than the long run average of 16 percent.

“However, more importantly and consistent with its historical profile, it was skewed to the upside,” the WGC report said. “In other words, gold prices typically fall less sharply than they rise.”

Investor takeaway

Nick Brooks, Head of Research and Investment Strategy for ETF Securities, describes bubbles as having stages. Even if there is a bubble, the real challenge is determining the stage of the bubble.

The GFMS prediction could suggest, as some have said, that we are currently moving through or into the latter stages.

However, it is very difficult to predict, and even GFMS has noted investor fatigue in the gold market. But some suggest that the current conditions could play out well for investors who turn to gold mining equities. Market watchers have long been saying that gold mining stocks are drastically undervalued, and a growing number are starting to focus more heavily on the potential bargains to be had.

In an article published in the Sydney Morning Herald, Matthew Kidman aruges that the risk/reward equation is no longer in favor of new buyers of the metal and advises that it is better to miss the final 25 percent of the bull market than to watch one’s investment melt down.

“If gold bugs have to stay in the game, perhaps a gold company rather than gold itself may be the safer plays these days,” he states.

Today’s growing sloth of gold bears is a buy signal, Frank Holmes, CEO and Chief Investment Officer of US Global Investors recently wrote in a market note.

The S&P/TSX Global Gold Index has declined 28 percent over the past four months, and this is bullish for gold stocks, according to Holmes. He cites research from Canaccord Genuity that suggests that the market may be in for a rally that should breathe life into gold equities.

Securities Disclosure: I, Michelle Smith, do not hold equity interests in any companies mentioned in this article.