How will gold perform in 2012?

The price of gold reached record highs in 2011. But what about 2012? Dominic Frisby looks at the experts' price forecasts for the year, and gives his own view on where gold is heading in the next 12 months.

The institutional gold price forecasts for the year ahead are finally in.

We have the London Bullion Market Association's (LBMA) annual forecasting competition, the Thomson Reuters GFMS annual gold survey, and the PriceWaterhouseCoopers 2012 Gold Price Report.

So let's take a look at what the professionals think gold is going to do in 2012.

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The consensus for gold next year is 'gently bullish'

The LBMA's forecast is always entertaining: 26 'players' in the world of gold and silver predict a high, a low and an average price for the year.

The LBMA's forecasts tend towards the conservative. Unlike the wilder calls of independent newsletter-writers and commentators you find in the darker reaches of the web, these contestants mostly work for 'sensible' banks.

So rather than attention-seeking mavericks, we have 'backside-covering' company men. Their forecasts reflect that. And if there's one consistent trend I've noted in the years that I've been following these forecasts, it's that they usually underestimate how well gold is going to perform.

For example, in 2011, it outperformed the average price forecast by $115 (8% or so). The most bullish forecast was for a high of $1,850 from bullion dealer Ross Norman of Sharps Pixley. Gold went to $1,920 in the end.

It is usually one of the more bullish forecasts that wins. As often as not, it's Norman who comes out on top, although in 2011 first place went to Edel Tully of UBS, who correctly guessed the average price.

This year, Tully is the most bullish forecaster. He sees a high of $2,500, a low of $1,400 and an average price of $2,050. That's a pretty bumpy year. Ross, on the other hand, has a calmer outlook. He sees a high of $2,100, a low of $1,590 and an average price of $1,765. Gently bullish, in other words.

The most bearish forecast comes from Rohit Savant of CPM Group in New York. He sees a high of $1,800, a low of $1,200 and an average of $1,612.

The average forecast is for an average price of $1,766, which would be a 10% rise on the year, with a high of $2,055 and a low of $1,443. If this forecast repeats the typical excess conservatism we've seen in the past, we can expect an average price 8% or so higher than $1,766. That would be $1,907. I'll take that.

Forecasts are just forecasts, nothing more. You get the impression that while some might study charts and calculate average price moves over the last 15 years, others have just taken a stab in the dark on their way to the water cooler.

Looking at the Thomson Reuters GFMS survey, we see that global investment demand rose by 20% last year to $80bn. In the physical markets, purchases of gold bars rose by more than a third to almost 1,200 tonnes, with demand particularly strong in China, Germany, Switzerland and Austria.

The report predicts an average around today's price of $1,640 for the first half of 2012 and a push towards $2,000 in the second half.

What about the miners?

The PwC report focuses more on mining companies and their activities. Looking back at their predictions for 2011, the gold mining company executives just as with our men from the LBMA erred towards the conservative. Though one I wish I knew who said $3,000.

For 2012, just as with the LBMA, the highest prediction is $2,500, the lowest is $1,350 and most hover around $2,000. 80% of those asked see an increase, 14% expect current levels to be maintained, and 6% see a decrease. The average price that will be used for mine planning and budgeting is $1,420.

I'll have more on the PwC report in the future. It is very interesting reading about how executives are planning to deal with the relative underperformance of mining stocks versus the metal.

Gold won't hit a new high in the first half of 2012

So, the overall consensus is, I would say, gently bullish. This automatically makes me think 2012 will be anything but gentle. We'll see.

For now the issue with gold is that falling blue trend line I have drawn in the chart below. Until it can break out above that, it's not going anywhere. I see quite strong resistance $1,670-80 area. On the other hand, it seems to have a floor where I have drawn that green line in the $1,530 area.


This pattern is typical for gold after it has made an interim high, as the chart below shows. It happened in 2006 and again in 2008 and to a lesser extent in late 2009. It takes many months of consolidation over a year in 2006 and 2008 before it breaks out to new highs.

The steepness of the current pullback has me a little concerned. There's something a little '2008' about it though in percentage terms (you would see this on a log chart), the pullback is actually quite small.


So, I'm going to make the same 'mistake' as the chaps from the LBMA in my prediction, which also ties in with our man from Thomson Reuteurs, and err towards the conservative. I see a low for the year of $1,535. (We may already have had it in the last week of 2011, in fact.)

I see an average price of, say, $1,850, maybe a little higher. We'll inch higher as the year goes by and the price could make several assaults on $1,900 in the latter part of the year. But I don't see new highs in gold (above $1,920) until the second half of this year at the earliest in fact, probably not till 2013.

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