Gold has started the new year on a positive note, reaching its one month high of ~$1644 per ounce this morning, though well off of its August 2011 high of ~$1900 per ounce. Later last year, the yellow metal had lost some of its luster but still closed the year up, for the eleventh year in a row.
Some of the factors that resulted in recent rally include rising appetite for gold in China, as the investors seek to protect their wealth against falling property prices and rising inflation. The demand in China is also usually highest before the Chinese Lunar New Year (beginning January 23). Consumer demand for gold improved in India in the last few weeks due to Indian currency’s rise against the dollar (making gold imports cheaper) and beginning of the wedding season.
Although there is no way to arrive at the fair value for gold or to assess whether it is over- or under-valued, I think that gold will continue its upward trend in 2012 due to 1) continued increase in money printing by the central banks in many countries leading to rise in inflationary expectations and 2) lack of investment alternatives for the official reserves managers (treasuries are too expensive and euro-zone bonds are risky).
On the other hand, slowdown in China and India will impact the demand this year. India has traditionally been the largest consumer of gold but was overtaken by China last year. Both together account for about 40% of annual global gold consumption. Also, US dollar and gold usually move in opposite directions. A strengthening US dollar can pressure gold prices.
What do you think about the direction of gold in 2012?
