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Gold watchers predict rough ride after 11 years of gains

This week will be crucial to gold investors and speculators as they analyze U.S. and European economic statistics to plan for the next 12 months.

Victor J. Blue/Bloomberg/Victor J. Blue/Bloomberg

Twelve for '12? That's the big question for gold investors this year: After 11 consecutive annual gains, will the precious metal's price rally for a 12th year in 2012?

The metal's upward trend hit a speed bump in the later months of 2011. Bullion, touted by gold bugs as an investment haven in times of uncertainty, fell 18.5 per cent from a record high in September despite worries that the Federal Reserve's quantitative easing would debase the U.S. dollar and that Europe's escalating debt crisis could cripple the global financial system.

This week will be crucial to gold investors and speculators as they analyze U.S. and European economic statistics – from unemployment and manufacturing to factory orders and inflation – to decide how to position themselves for the next 12 months.

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Most forecasters expect gold to rise in 2012, but there could be more bumps along the way. Bloomberg News reported this past week that speculators in New York futures are the least bullish in 31 months, yet the median estimate among 44 traders and analysts is for prices to surge more than 35 per cent to $2,140 (U.S.) in 2012. Gold holdings by exchange-traded funds rose to a record this month, but the SPDR Gold Trust, the largest of them all, has scaled back.

Gold settled at $1,566.80 (U.S.) an ounce in New York on Friday, bringing its gain for the year to 9.2 per cent. In the past 11 years, it has risen nearly sixfold.

Bart Melek, head of commodity strategy at TD Securities Inc. in Toronto, believes gold will trade around $1,550 (U.S.) in the first quarter as investors continue to favour the U.S. dollar for safety amid concerns over Europe's finances and easing gold demand from China and India. He expects the metal to rise to around $2,100 (U.S.) in the fourth quarter after governments and central banks act to fix Europe and stimulate economic growth.

The strengthening of the U.S. dollar since August and the corresponding drop in the price of gold has confounded gold optimists. They're perplexed that investors are turning to the greenback for safety despite fears the Fed's quantitative easing will trigger hyperinflation, and after Standard & Poor's cut its assessment of U.S. creditworthiness in August.

"Assets are flowing to the most liquid asset in the world right now, which is the U.S. currency," said Paul de Sousa, head of business development at Bullion Management Group Inc. in Toronto. "Gold is always a haven in times of uncertainty, and what's been happening in the past few weeks and months doesn't negate that. Ultimately, the world's reserve currency is issued by the world's largest debtor nation. Isn't that ironic?"

Many traders say that bullion moves in the opposite direction to the U.S. dollar because the two are considered rival currencies. If that relationship continues to hold true, any further strengthening in the dollar would be a drag on the price of gold.

"[A stronger U.S. dollar is]going to create a headwind for most of the commodities, and more so for gold because a lot of people were using gold as a hedge against the U.S. dollar," said Alfred Lee, an investment strategist with BMO Asset Management Inc. in Toronto. "Now [the dollar's rise is] really testing their thesis: Is gold really an alternative to the U.S. dollar?"

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About the Author
Investment Reporter

Nicolas Johnson has covered global finance, markets and investing since 1998. He joined The Globe and Mail in 2011. He has worked as a reporter and editor with Bloomberg News in Paris and Tokyo, and also worked briefly in emerging-market debt at Société Générale. More

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