The 2012 gold forecast

Once the primary currency in its own right, gold offers a level of stability not offered by any other form of money. And coming off a year marked by economic crises and rising debt, the outlook for this precious metal is shinier than ever, argues Fair Trading Technology CEO Tim Haman.

Gold is the difficult one. 

It is not controlled by any central bank, yet all central banks are now buying gold again after 15 to 20 years of net selling. It means that the central bank reserves are partly set in gold. And central banks are the only issuers of money, aren’t they? Gold is not yet used as money again, as it was for 3000 years, but still it is the most pure store of wealth there is. It offers inflation protection. Store of value. But where is the finality of settlement in gold? When will we be paying with gold coins again? Will it happen?

Recapping the 2011 story of gold, it really depends what we compare it with. We can compare with EUR or USD, or AUD or TRY or VUV or ZAR—it all depends on where we live. The form of money that we know best is our local currency. Many treat USD as the world currency of choice, so let's begin here. In 2011, gold's lowest price in USD was $1318.40/oz and its highest was $1920/oz, with a whopping $602 tunnel. That is a 45% distance measured from the $1300 level and 31% from the 1900 level. Is gold now increasing in pure dollar value, or is 31% of the dollar's value gone? Vanished? In one year?!

In EUR, gold's low was €961.5 and €1357,57 at its highest, a tunnel of €396,07, making 41% or 29% respectively. So the EUR held its ground a little better against gold than USD.

And if we compare the EUR/USD currency rates, the starting value in January 2011 was 1.3343, with a peak of 1.4696 in May, and now back down to 1.2951 at the close of 2011.

In USD, gold increased by about 18%, and in EUR 21%.

What can we read from this data? Can this help us predict the price range for gold in 2012?

Unfortunately, there is no crystal ball we can gaze into here. But we could make some assumptions.

Gold could possibly come down hard, becoming purely bearish, and hit levels far below $1000/oz— maybe even below $700/oz—which would be down 50 to 70% from today’s levels. Yes, this will happen when there is no EUR crisis and no debt to speak of in the US, when it is discovered that the 20 trillion USD missing in the system (along with the 11 trillion EUR) was just an error in the spread sheets. Currencies could be deflated rapidly, but no one knows if that will really work either. So it is possible, but not likely.

To just print the missing money could create inflation beyond control. If the central banks attempt that too quickly, gold will triple in price in the peaks and easily double as the floor. A triple would mean a peak of over $4500/oz with a 200 day moving average in the range of $3500/oz.

In 2012, this scenario is possible but not likely. Why not?

So many factors help decide the price of gold. Demand is one factor. How much trend traders are tagging along will also affect the price. And the movements just get bigger with price—a 1% daily move of $500 is just $5, but on $4500, it is $45.

The bear market in stocks began in 2000 and is still ongoing, whereas the bull market on gold and silver started in 2001 and is still ongoing. Price corrections from trend traders (or even central banks) trying to catch rising profits are bound to happen. It is better to buy gold and hold it in a bull market than to try to catch the highs and the lows in session. You can still leverage your gold position without trading it.

So, what are the 2012 estimates of gold prices? There is a breakout happening, and I believe we will see a couple of attempts to reach the $2000/oz level this spring before gold finally establishes a ground above $2000/oz. By summer/autumn 2012, it could very well be established over $2000/oz. Peaks may go as high as $2500 with the lows touching $1500/oz.

A year from now, in January 2013, instead of $1600/oz, as it stands today, an estimated price of $2200/oz is entirely possible.

Then, there are some interesting correlations between some of the monetary measures:

The gold:silver ratio is currently around 55. This is bound to go down to 16:1, meaning that instead of 55 ounces of silver to one ounce of gold, only 16 will be needed. With a gold price of $3000/oz, that will be $187/oz for silver. This will take time, and tin the interim, the Dow will go down to below 3000 (ie. 1 ounce of gold). Dow:gold ratio comes down to 1, while gold:silver ratio comes down to 16. That is a huge movement—and profit opportunity, if one can act upon it.

Silver is very volatile and can very well move 80% per year. So it is conceivable that over time, the price of silver could increase from today's $29/oz to $187/oz, a 550% increase. The question is, will you survive the movements?

How much supply of gold and silver will there be? How much really exists today, and where is it? Don’t be fooled by gold and silver on paper. You need physical holdings, in your control, since the reports of weight are not going to be trusted the crises get deeper and general paranoia sets in.

As an example: in the US, the latest closed audit of Fort Knox reported that they carry 9000+ tonnes of gold. In the books taken as a value of last notation and not the spot value. And no one has openly checked and been able to report if the gold is really there. In more than 30 years, there has been no official, public checks or audits made. (gata.org/files/GATA-AD-01-29-2008.pdf)

The total amount of gold ever mined is supposed to be about 160,000 tonnes. Is this true? Is the gold price manipulated? Who would benefit?

We don’t know. What we do know, however, is how the picture has been over the past 10 years:

And the next 10 years?

Are you still going to put money in your pension plan?

Remember the inflation protection that gold carries. For example, one barrel of crude oil priced in gold in 1946: 1.55 grams. In 2011: 1.61 grams.

Try comparing that to the dollar and then decide.