By: Ben Myers
Last week saw the traditional safe haven precious metal drop by 9%, to $1,561 an ounce, down almost 20% from September’s record high of $1,923.70 an ounce. Whilst gold is moving towards an annual increase for the 11th consecutive year, this week’s fall indicates it’s about to register its first quarterly decline in three years. Talks of the Gold market seeing its bubble burst may seem premature for some, after all, investors are still holding record amounts of metal in exchange-traded products; valued at $120.2 billion, but with the spot price reaching a new three month low and estimates of prices falling in a Bear market, to around the $1,400 an ounce mark early next year, will Gold be able to show an increase for 12th consecutive year?
As a unwritten rule, Gold generally moves in the opposite direction to the USD and last week saw the Greenback re-emerge as a safe haven currency in the wake of the markets losing even more hope over the much troubled Euro. The USD reached its highest level against the EUR as the Federal Open Market Committee decided to maintain its current policy position in December expecting the recovery in the economy to slowly gain momentum over the next year. The central bank will continue a tactic of wait-and-see over the course of the first half of 2012 as the threat of a double-dip recession decreases.
Forecast for Gold
However, the fundamentals for Gold are actually quite positive, with demand for physical gold this quarter accelerating at its quickest pace in over a year as the debt crisis in Europe deepened. The European Central Bank reduced interest rates for a second consecutive month, primarily to shore up what little growth there is and the lower rates further increase the appeal of Gold.
The increase for demand for Gold came at a time when the commodities markets declined the highest amount in nearly three months as more than $640 billion was lost from the value of global equities on 14th December as the Fed held back from implementing new stimulus measures.
So what does all this mean to the price of Gold in the future? Well, in the short term, expect lower prices in the upcoming week as the Federal Reserve plays down talk for another major asset purchase program.
The outlook for 2012 is very much mixed. With no end to the debt crisis in sight, a slowing Chinese economy and fears of a double dip recession looming in some of the worlds largest economies, the first half of the year looks to be a Bearish one for Gold but does look set for a short-term correction at some point soon as the RSI bounces back from oversold areas.
With no hope of a resolution in sight in the Eurozone, the USD should continue to find support against the EUR pushing the price of Gold down. Although I would say the bubble has indeed burst for the early part of 2012 and I would not be surprised to see the price fall to around the $1475 mark, don’t write off the chances of Gold increasing for a 12th consecutive year. The underlying fundamentals are strong and there is the faintest hope of a consumer led recovery and an avoidance of a double dip recession. I expect there to be progress in the EU debt crisis as the year progresses, and this should see Gold rally in the second part of 2012, possibly breaking the $2,000 an ounce barrier. But, until there is a resolution, the crisis in Europe will continue to have an adverse affect upon the EUR/USD which in turn will bring down the price of Gold as well as Silver.