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12.16.2011

2012: Gold….Hold On!


Gold is down in dumps and the year end is closing on. What’s in store for the metal in 2012? When gold surged to all time highs above $1900 per ounce in September, apart from the evidence that the world economy is sputtering to downhill, there were ample enough hopes that the US Fed would launch another round of its quantitative easing soon. However, the momentum generated during the middle of the year is holding on quite steadily in the US economy with the nonfarm payrolls hitting and initial jobless claims plummeting to three year lows. The dollar has been rallying ever since and though it looks that the gains have been triggered due to a shoddy outlook for Eurozone economy, a meaningful part of the strength could also be linked to the positive vibes witnessed in US economy itself. This seems to be one of the biggest negative influences for the latest plunge in gold. The yellow metal had rallied sharply on previous rounds of QEs.

While it is not a very easy task to give the outlook for any asset for the upcoming year, the downward lurch in gold seems to have pulled the metal at attractive level particularly in the global markets. While a further drop from hereon could take the metal near $1500, it might not sustain there for long and rise towards something like $1700-1800 in the first quarter of the year. Gold prices tend to mostly rise in the first quarter of the calendar year and there is no reason why 2012 could be different. Where the metal would hold onto these gains and rise towards $2000 in the first half of the year would depend upon the turn of events in the currency markets as well as the risk appetitive. The recent episodes of downswings in gold have been followed by long periods when the metal has tended to behave like a risky assets though its gains have normally beat equities and bulk of the commodities. With the prices down nearly $300 from its all time highs in last three months, the gold prices are looking well poised for a sustained move up from thereon irrespective of the forces in risky assets.

From the Indian demand perspective, the year gone by has witnessed the prices complete a giant cycle from 20000 to 30000 in a span of less than one year. Almost the upside was boosted to a certain extent from the INR’s depreciation, the exorbitant gain of nearly 10000 rupees could linger around for a while from the psychological aspect for the Indian buyers in investment and retail demand side. This very factor could limit the losses for the local prices given that a fall towards Rs 26000-25000 levels would bring in frenzied demand. Gold’s latest drop has ensured that it acts exactly like a risky asset. Now this is similar to 2008 when the metal collapsed in the aftermath of the Lehman debacle, tracking the strength in the dollar and defying all the positive logic even as the world seemed to be headed for a catastrophe.

The conditions are similar except to the fact that the world is headed for an even bigger shock this time around with the possibility of a break up of Eurozone very much on cards. This could be a cataclysmic event and could see the metal explore fresh highs at a gravity defying pace.  2012 is widely prophesied as the year of doom…the end of the world. Well the financial markets could certainly witness such an end with Euro cracking up and US debt deadlock rumbling on further- even as the debt to gdp ratio nears 100%.  In case if both the events happen together and there is a very good possibility of that happening, Gold could be the last man standing up.