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Gold and silver in 2013: climb, consolidate or collapse?

While fundamentals seem to favour much stronger gold and silver prices this year, strange goings-on in the markets, should they continue, could see price rises fall short of expectations.

Yes – its annual stick your neck out time for precious metals commentators as we try and foretell what will happen in the markets over the coming year – and precious metals price forecasting is an invidious business. 

Once you go on record with a prediction it’s there for all to see – and, if you’re unlucky, to refer back to should your crystal ball prove to be wildly incorrect.

So, firstly, what is this writer’s track record in predicting the gold price? Well, in 2012 not great, although far less inaccurate than most. 

My prediction for the year-end gold price was $1875 – well above the final London close for the year of $1664, indeed a little more than $200 (or 12%) out. 

Perhaps not too bad, when one considers that in January, $2,000 was a fairly common year-end target and even the more conservative analysts were mostly predicting better things for the gold price.

For 2011, I was also rather over-optimistic with a year-end price prediction of $1760 against a final London close of $1574, despite gold soaring to well above this predicted level earlier in the year.  Timing is everything in the gold price prediction game.  This was 10.6% above the final figure – and even so, far closer than many were predicting.

Now if we go back to 2010, I managed to come within $34 of the year-end price of $1410 – this time on the conservative side and only 2.4% out.

So, what about 2013? The global economic price drivers which have brought the yellow metal to where it is today are virtually all still in place.

Indeed, some parts of the global economy are remain pretty dire and there’s likely to plenty of bad news still ahead which should drive the gold price higher. Indeed the likely fudge over the Fiscal Cliff in the US has already seen nearly a $20 rise in the gold price over the New Year holiday in Asian markets.  Will this be sustained once the US markets open?

In recent months we have seen some strange market activity which defies normal trading logic. Activity which suggests the gold market (and the silver one too) are open to manipulative abuse through huge amounts of paper metal being dumped instantaneously in what looks to be a concerted effort to keep the price from rising – or indeed to force it lower.

It may just be that some institutions with enormous pockets are using high frequency trading to drive the price down, taking weak holders out of the market to then buy back at lower prices and make vast profits when gold does eventually move to a higher level.  Others attribute more sinister motives to these sales – see Sinclair incandescent – biggest manipulative play in gold ever as an example of one such interpretation of what has been seen as the most recent take-down in the gold price.

While I personally discount the likelihood of a major gold price crash during the current year, there are obviously powerful forces at play which seem to cause the metal price to defy logic.

Virtually all the fundamental indicators suggest that the gold price should increase, and increase strongly in 2013.

On the demand side, Gold and silver coin sales and ETF investment remains at an extremely high level despite the recent gold market shenanigans. Central Banks are continuing to buy gold at significant levels, while Asian markets continue to see a high rate of gold purchases and there is very strong anecdotal suggestion that China, in particular, is substantially increasing its own gold reserves without accounting for the rise yet in its ‘official’ figure.

And this doesn’t even take into account continuing economic turmoil globally with the fear that, at some stage, all the money being pumped into the system by Central Banks will lead to rapidly rising inflation – which tends to be positive for gold, at least in people’s minds.

On the supply side, mined output of gold is at best flat, and will probably be lower this year than last when the final figures are tallied, and insufficient new resources to move the trend in an upwards direction are being found, while scrap supplies appear to be running at lower levels than they have been of late.

Thus, with demand from Asia (including gold purchasing powerhouses India and China) and from Central Banks combined expected to exceed around 2,000 tonnes in 2013 – close to 75% of global mine supply, the supply/demand balance will likely remain tight.

From a chart point of view, the recent consolidation pattern has basically mirrored that of 2008 and 2006 (and perhaps to a lesser extent 2010).  True, the latest consolidation appears to be longer lived, and more extreme, than previous ones, but that is largely a function of the higher price now prevailing.  In each previous case the gold price has seen a 1-2 year uptick from the time the consolidation ended – will 2013 see the same again?

Returning to the possibility of a sustained gold price plunge, any serious reduction in the price will drive marginal mines out of business (and there are an increasing number of these as grades continue to fall and costs rise) and delay, or kill altogether, many new mining projects which need current price levels, or higher, to come to fruition.

Thus if the price should fall further the likelihood is that the resultant supply deficit would see a rapid return to higher prices before long.

So where does that leave the gold price in 2013?

Logically, on fundamentals, it should probably move subtantially higher with the long awaited $2,000 in prospect.  However the interventions in the market may well continue and no big upwards spurt is likely until the ‘illogical’ dumping of high volumes of paper gold either ceases, or is negated by some exterior piece of news which more than counteracts the market manipulation.

This could be a break-up of the Eurozone – which seems increasingly unlikely given Mario Draghi’s stance on this – war in the Middle East, or perhaps even more seriously over the disputed uninhabited islands bringing China and Japan into conflict, something which could escalate dramatically, likely involving the U.S.

Or perhaps China may announce that it has indeed been building its gold reserves and that these now total 2,000 tonnes or some other such figure, the news of which could put a sharp poker under the gold price.

But, perhaps more likely, none of the above will actually happen in 2013.  The manipulators on COMEX could allow the price to rise, not dramatically, as it seems they are in control for the time being.

However, even a modest 10% rise in price will see gold breach what could be a major psychological level of $1800 and if this should happen we could see a rapid rise back to the $1900 level – possibly even a new high developing – but again this could provoke major market intervention bringing the price back sharply as happened in 2011 when the price rise seen then was perhaps more rapid that the markets would accept.

Thus the writer’s personal prediction is for gold to end 2013 at around $1830 – in effect a 10% rise – in keeping with gold’s overall upwards performance year on year.  Not as big an advance as seen in some prior years, but higher than the 4% rise for 2012.

What about silver?

For the moment, silver  price advances are tied fairly closely to gold, tending to rise faster on the upside and fall further on the downside.

The silver market is also more prone to manipulation by entities with big pockets than gold given its much smaller size, which adds another negative factor into the equation.

However, any silver price prediction has to take the gold price into account, and also the gold:silver ratio, which currently sits at 55.  A rising gold price does suggest a falling gold:silver ratio given silver’s gtreater volatility.  On this basis the prediction is for a year-end gold:silver ratio of 52 and a silver price of $35.

Looking longer term though, at some stage some strong gold-boosting event or other will likely occur and the COMEX manipulation may well cease until a little stability returns –  This could well see gold rise to around $2500 and silver to over $50 within the next two to three years – and continue their overall upwards path thereafter. 

When I started writing for, and then managing, Mineweb, onlya little over 6 years ago in September 2006, the gold price was around $600 and predictions of $1,000 gold seemed out of sight and far fetched and were treated by many analysts with scorn.  Silver was at $12 having seen a 30% increase already that year.  Investing in gold and silver at that time would thus have seen great gains. 

Again, if one looks at the chart above the rate of price increase, as shown by the steepness of the graph, has accelerated as the global economy has been seen to deteriorate.  Within the next two to three years $2,000, $2,500 or even higher looks as though it could yet be on the cards.  Thus once the current consolidation is behind us the likelihood would appear to be that the higher rate of increase will return – perhaps not this coming year, but almost certainly through the remainder of the decade.  The gold bull run likely looks to have a way to go yet.

iPad Version: Picture – Gold bars are pictured at the Ginza Tanaka store during a photo opportunity in Tokyo: REUTERS/Yuriko Nakao

 
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