Is it a Good Time to Invest in Gold in 2012?

Is Gold a Good Investment in 2012?

Gold has been in a bull market for over a decade. The price of gold finished 2010 at $1410: by the end of 2011, it had reached $1574, having traded as high as nearly $1900 in August. Even given the pull back from its high, the yearly performance of more than 11.5% was another sizeable upward move for the yellow metal. To date this year, gold has put on another $200 an ounce, and is now trading at $1774 – or an increase of nearly 13% in under two months.

Many market analysts are forecasting that the gold price will continue to rise for the foreseeable future, but is such optimism justified by market fundamentals? Looking at the broad factors that affect the price of gold it is possible to assess this optimism more fully.

The Economic Outlook

Fears of recession, centring on Europe but spreading outward from there, may hold back demand for the gold price in the short term. With the IMF cutting forecasts for global growth, and the European Union coming into line with its forecast for a recession in the Eurozone countries and flat growth overall for the European Union, demand for gold could be dampened.

However, against this backdrop comes several factors that are likely to provide upward pressure to the gold price.

Combating a stalling economy, real interest rates in both the USA and across Europe are in negative territory. America’s Fed has recently announced it expects to hold rates between 0% and 0.25% for at least another two years. Meanwhile, economies are suffering from creeping inflation as high oil and commodity prices begin to bite.

Further, both the US and Europe have been exercising a policy of quantitative easing – effectively printing money. This is seen as inflationary in the longer term.

Battling against a weak economy, the US has increased the size of its net debt and is fighting a burgeoning budget deficit. Sovereign debt is a problem that is threatening the Euro as a philosophy as well as a currency, and at some point in the future the US will have to address its debt problems also.

The USA also has a huge trade deficit, which it is partially fighting by encouraging its currency to weaken.

Supply and Demand

Traditional demand for gold has been outstripping supply for some years. Central Banks have, so far, been willing sellers of gold into a rising price, though this activity may not continue much longer.

Whilst demand may weaken in the anticipated economic downturn, it is likely that gold mining companies will meet any deterioration of demand with a cut in supply. As existing mines become exhausted, gold supply may contract in coming years helping to maintain higher prices.

Investment demand, particularly from China and India, is expected to continue to grow. Far Eastern Central Banks have increased their gold purchases as they attempt to diversify away from US Dollar investments and hedge against Treasury bond holdings.

The Political Environment

The Middle East is on a knife-edge as its peoples veer away from dictatorial regimes and demand democracy. Iran is nearing nuclear capability and Syria is in turmoil. The West’s withdrawal of troops from Iraq, and Afghanistan, may leave a void that others will seek to exploit.

North Korea is a problem that refuses to be solved, and eyes will be focused on possible political infighting as the country comes to terms with Kim Jong Il’s death in December.

In Europe, austerity measures required to fight out of control sovereign debt is leading to social unrest and political change.

Currency Issues

With huge double deficits, and an economic policy focused on low interest rates and increasing money supply to boost activity, the US Dollar is likely to remain weak through 2012 and into 2013.

As other countries fight against relative currency appreciation, gold is likely to be the winner.

Conclusion

In the 1970’s, the US saw its debt increase and its inflation remained high as the Dollar lost value. The US was involved in an expensive war on foreign soil, and the oil crisis hit pockets, the economy, and the stock market. Amidst this, gold rocketed from $35 to $800 in a little under a decade.

There are many parallels that can be drawn between the 1970’s and the present day. Since bouncing off its low of around $250 in 1999, gold has risen sharply, but still nowhere near the amount by which it increased through the 1970’s.

In summary, the factors that affect the price of gold are pointing to continued firmness in its price throughout 2012 and beyond.