Gold prices will peak sometime between the end of 2012 and the beginning of 2013, according to GFMS, an independent research consultancy owned by Thomson Reuters.
GFMS, in its 2011 Gold Survey report, forecasts a volatile year for gold prices, with gold sinking as low as $1,600-$1,550 (U.S.) an ounce, averaging out at $1,760 and perhaps spiking to $2,000 an ounce. But then the party is over.
"We think the peak would be towards the end of this year or maybe in the first half of next year," says Neil Meader, research director at Thomson Reuters GFMS. The end to gold's 10-year bull run would come with a renewed faith in currencies, as the structural imbalances that have impeded paper money slowly start to fade.
"One overt trigger that is worth looking for is the start of a serious ratcheting up in interest rates, because for gold investment to be popular you do need very low interest rates," says Meader.
Most countries currently have a negative real rate of return – that is the interest rate minus the inflation rate – which means cash in the bank is worth less and gold is a safe place to store wealth. Once the interest rate landscape changes, the need for gold as a safe haven could dissipate.
Gold prices will have a tough time, however, moving substantially higher until Indian demand picks back up. Jewelry demand in the country fell 3 per cent in 2011 with net bullion gold imports of 970 tons, but compared to a 16 per cent increase in Chinese demand, India fell woefully short.
According to GFMS, the first half of 2011 saw very strong buying from India as consumers rightly anticipated higher prices and loaded up on "cheaper" gold. As gold soared in the back half of the year, demand slowed to a crawl. The World Gold Council said that jewelry demand tanked 28 per cent in the third quarter. From July to December, gold prices in rupee terms were up 25 per cent as the dollar appreciated against the local currency and as inflation ballooned to 10 per cent making gold too expensive to buy.
"There is a huge amount of strategy that goes into Indian buying," says Meader, who thinks if gold prices can stabilize and the rupee can gain ground against the dollar then buying could pick back up. "You do quite often see very good buying on the dip."
China, in comparison, has seen robust gold demand, importing 389 tons of gold in the first 11 months of the year, but there are questions as to if this strong buying can last. China grew 8.9 per cent in the fourth quarter, but many experts are worried about a more substantial slowdown in the months to come.
"The link not as clear cut," says Meader when discussing slowing Chinese growth and gold demand. "Those with funds to invest might not be directly affected by any slowdown and if you've got equity weakness or the property market there is under pressure because of that slower level of growth you could see funds moving into gold."
Meader says the lower end gold market in China, like 18 karat gold, could be effected because it directly relates to the consumer. "But if you are looking at 24 karat gold, that is much more of an investment story." The Chinese New Year kicks off at the end of January, however, and many analysts believe buying was so strong at the end of 2011 because people were buying ahead of the holiday, which means buying could slow starting in February.
Gold production is also growing, reaching a record of 2,812 tons in 2011. Mine supply was up 3.8 per cent in 2011 at 103 tons, although the gold was easily absorbed by China, which imported that much gold in November alone. Mine production is expected to continue to grow 3.2 per cent in 2012 as the mine lives of older projects are expanded so companies can take full advantage of a higher gold price and as more recent projects ramp up to full capacity.
The final problem for high gold prices is the battle between strong bar demand and weak investor demand. Bar demand was huge in 2011 – up 26 per cent in the second half of the year. Indian bar demand popped to a fresh record of 282 tons in 2011 and accounted for nearly a quarter of world physical bar investment, according to GFMS, while Chinese bar demand ballooned 45 per cent to 258 tons.
However, ETF and futures demand fell off a cliff in 2011. Speculative net long positions on the Comex are currently at three year lows after shedding 90,000 contracts in 2011. Global ETFs added 154 tons of gold in 2011 but that was down 57 per cent from a year earlier.