“2012 will be a difficult year for all forecasters of commodities, equities, interest rates, etc. – The macroeconomic background will include a recession in Europe, difficult politics in the US (with no certainty that President Obama will not be reelected), and slowing growth in gold’s two largest physical markets – India and China. Indeed, with slow growth or recession all around - the US economy will remain problematic in 2012 – gold prices will be pulled intermittently lower. 2008 serves as a rough guide in this regard; gold declined some 30% peak-trough in 2008 on the back of the recession. With gold recently having peaked at $1895 (pm fix) a 30% retracement would put gold below $1400. We think the low for 2012 will be higher than that however.”

 So says Martin Murenbeeld Chief Economist at DundeeWealth Economics in an email to Mineweb, prompted by our annual Gold Price Competition.  He has a strong record in predicting gold price performance, and this time around has come up with a broad estimate for the yellow metal’s performance in the year ahead given the uncertainty in the markets.

 Murenbeeld is thus predicting that the gold price will move in a range between $1450 and $2125 in 2012 with a year-end price of $1950 and an average of $1835.  How accurate this will be obviously remains to be seen, but is very much in the conservative mid range of forecasts, suggesting no really big falls or massive increases.

 He reckons the US dollar will not likely be a bullish factor for gold, although the dollar is fundamentally overvalued (specifically against the yuan and associated currencies of the Far East), and should decline. Depending upon US politics, he suggests that Congress could force dollar “devaluation”, which would be quite bullish for gold.

 On the shape of the Chinese economy, he feels that this is a large uncertainty for 2012; a significant slowdown – or recession (growth below, say, 6%) – would likely pull gold down. Gold could accordingly experience its first year-over-year decline since 2001. (Every bull-cycle since 1800 has seen a mid-cycle, year-on-year, “correction” he points out; one of these years it will happen, but is not forecasting it for 2012 in DundeeWealth’s base-line scenario.)

 The key bullish factor, as he sees it, has thus not changed for years: monetary reflation. In response to record government debt levels, slow growth/recession, and a drift in much of the OECD towards deflation as the household sector continues to deleverage and governments are forced to cut entitlements, the full weight of economic stimulus falls on the shoulders of central banks. With a 1930’s environment threatening to engulf Europe, the ECB and other central banks (including the PBoC) will maintain extremely loose monetary policies throughout 2012; the Fed, if nothing else, will wish to ring-fence the U.S. financial sector in the likely event the Eurozone is downsized or splits. The monetary reflation factor alone, depending upon the specific crisis, could see gold rise well above $2000.

 Other factors should continue to favour gold in 2012, including central bank gold demand, which should add to demand for years to come, and geopolitical turmoil in the Middle East and elsewhere. The latter could cause periodic surges in the gold price, surges likely also to be reflected in the oil price.

In short, reckons Murenbeeld, 2012 will, somewhat like 2008, be a contest between recession and monetary reflation. He is forecasting reflation will win the day for gold.

So how does this viewpoint compare with other mainstream prediction scenarios.  Mineweb readers will already have seen that both HSBC and Barclays have lowered their gold price predictions for 2012 following the sharp price downturn at the end of 2011, although still remaining pretty bullish overall (see HSBC, Barclays cut 2012 gold price forecast)

The report noted that HSBC’s chief commodity analyst James Steel slashed his 2012 forecast to $1,850 an ounce from his previous target of $2,025, citing a weak euro, liquidation related to equities’ losses and lacklustre physical demand from emerging markets.  Steel also kept the bank’s 2012 silver view unchanged at $34 an ounce but he cut his price forecasts for platinum and palladium.

While at Barclays, analysts forecast that gold prices would average $1,875 an ounce in 2012 as it battles a host of factors including soft physical demand, a strong dollar and technical selling. In November 2011, the bank had forecast $2,000.

Barclays’ precious metals analyst Suki Cooper said that gold in the longer term should still rally to a new record at above $2,000 an ounce.

Deutsche Bank too has cut its average estimate for the 2012 gold price to $1,825 – and even though this represents a cut of 3.9% from its previous estimate is still an obviously bullish forecast given the current level of $1,620 or thereabouts.  In a report on MarketWatch the bank noted “However, we view underlying fundamentals as still bullish… The persistence of negative real interest rates will sustain the appeal of holding gold, in our view. We also expect central bank gold buying will continue and that tail event risk as it relates to the European sovereign debt crisis and the European Central Bank’s balance sheet will encourage gold prices to recover.”

In short, these viewpoints virtually mirror those of Murenbeeld.  Uncertainty and volatility ahead, but bullish overall.  Indeed the general consensus among bank analysts is actually remarkably positive for the yellow metal looking ahead contrasting with mostly exceedingly cautious predictions in the past.

In another, more technical analysis from UBS’s Julien Garren, he suggests that short-term at least, the outlook remains bearish technically as long as the resistance at 1641.93 is intact. Near-term support lies at 1592.75, a move below which would expose 1561.75. A clearance of 1641.93 would trigger a bull trend and open 1667.03 next, but even so continues to believe that overall gold & gold equities will outperform the mining sector and the market in H1 2012, on a relative basis first, and then in absolute terms.

At London gold dealer Sharps Pixley, Ross Norman notes:  “Fundamentally gold remains a good bet – the market is supply constrained and demand in Asia remains robust. As such gold has a strong underpinning. However the ‘economic premium’ in the gold price may remain volatile, reflecting increased uncertainty and heightened anxiety during H1. On the negative side a firmer dollar (in election year) could provide a drag on runaway prices.” But despite hedging his bets in the analysis, he too is looking for a positive gold price advance this year with an overall average of $1765.

So even the mainstream remains overall positive on gold which, as we have noted before, might alert contrarians to short the market!  But the ongoing political and financial turmoil, which is not just restricted to the major Western economies and Japan, should continue to support the gold price overall and this should be price-positive for gold in the year ahead.  U.S. dollar strength is, perhaps, the most likely limiting factor, but there is also a continuing feeling that the dollar is overvalued and that the U.S. may indeed move towards devaluation (although is unlikely to call it that, or admit to doing so) as a means of easing its own debt problems.

So do expect volatility in the year ahead.  Gold could easily fluctuate in an even wider range than Murenbeeld predicts and gold investors may have a rough ride before, in our view, coming out on top.  

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