Where will gold be in New Year? You have as many price forecasts for the metal as there are experts. But, in terms of volatility, gold beats any other commodity by a long margin, the experts without an exception admit they are treading on a high risk ground while making a price forecast.
True, in the gold’s journey from a low of $220 an ounce in 1999 to the record price of $1,225 on December 3, the precious metal went through quite a few hair raising roller coaster rides. Every time this happens, one or the other expert is left red-faced. Incidentally, the record price we saw about four weeks ago falls well below the 1980 price extrapolated in real terms to the present day. This means if someone had bought gold in 1980 and held it, the real price of that now is about $2,300 an ounce.
The risk inherent in gold buying at any point explains why funds dedicated to the metal, here and abroad, are not promoted heavily. An official of BlackRock Gold and General says meaningfully, “While we have always believed gold should be a small part of a diversified portfolio, we did not want to see widows and orphans put their life savings into it.” No one will miss the cautious underpinning of that message.
Exercise of prudence in gold buying or in investing in dedicated funds is warranted if one considers the big spread between the highest and lowest price forecasts for 2010. On the one hand, we have American Precious Metals Advisors (APMA) wanting us not to be surprised if gold climbs to $1,500 by the end of next year. In this journey to a new high, however, warns APMA, gold will see high volatility and occasional sharp price reversals of up to $100 an ounce. There will be times when investors may tend to believe that the long bull run in gold has finally ended. Technical corrections as seen now will in any case be warranted as gold remains in an overbought position. Rally in dollar creates the ground for gold’s retreat. Whenever this happens, bargain hunters see an opportunity.
If BlackRock’s faith in gold remains unmatched, you have on the other side ODL, the UK’s options trading house, which says that if the $1,100 support level is breached, then the “sell off will continue possibly back towards $1,000 and dragging other metals” down in the process. Gold has not found support at that crucial level and therefore, guessing has begun as to at what point the rebound in price will happen. Some are already seeing $1,000 as the new floor for gold.
Macquarie has become a shade more bullish about both gold and silver since it made the last price projections and it now sees average gold price of $1,150 for 2010. The 2010 price forecast for silver is $17.69. Macquaire anticipates some price corrections for both the metals in 2011 — gold at $1,100 and silver at $16.92.
The precious metal analyst at Barclays Capital says, “In terms of technical trends the prospects for gold look strong, but the underlying fundamentals look weak.” It is a foregone conclusion that high gold prices will be taking a toll of jewellery demand. Large scale gold recycling, as is seen in India, if anything keeps the new metal demand down. This is happening as annual world supply is falling since 2005 when production was 2,518 tonnes. Last year gold production was down to 2,356 tonnes.
This is in spite of China raising gold production by 59 per cent since 2001 to 260 tonnes. Russia has also made spirited strides to raise production this year by over 11 per cent to 206 tonnes. South Africa and Australia are principally responsible for the world setback in gold production. In this context, what is important for the price outlook is whether incremental investment demand, if any will compensate for the volume loss on jewellery account. What happens with the dollar will always remain the prime mover for gold. As dollar has started gaining in value, so also the non-gold assets are no longer in the dumps. Oil prices remain range bound. All this can only trigger gold price correction.
At the same time, a group of experts will look beyond what is happening to gold immediately and say that the economic environment remains uncertain to continue to keep the metal as a covetable alternative asset for investors, including central banks. The havoc that last year’s financial crisis wrought all over the world has left scars which will take time to heal. That is yet another positive for gold. Whichever side of gold the experts find themselves, they admit of holding the metal on their personal account and recommend that everyone should have some gold in his portfolio.