Did the Gold Bull Run End in 2012?

24th December 2012

The soaring price of gold started to ease over the course of 2012, leading some to question if the decade-long bull market for the yellow metal had drawn to a close.

Gold prices have seen an upward trend since the start of the decade and rose significantly as the financial crisis began to spread in 2007. Thanks to the metal’s safe haven status and demand for jewelry, gold has risen by close to 300% over the past ten years.

But gold has started to come down from recent highs. Signs of progress on the US fiscal cliff and the fading into the background of the eurozone crisis have bolstered investors’ confidence and pushed them from the safety of gold towards riskier assets such as equities.

Given that gold produces no income, it could be argued that it has been in a bubble since time immemorial and overdue a correction. On the other hand, I think there are a number of factors to suggest that the bull market for gold is set to continue for at least another year.

Calling the end of gold bull run

As of 19 December, the gold spot price was around $1,673/oz. This was a slight improvement over recent days when it dropped to a three-and-a-half month low, but below the record nominal high of $1,920 seen in September 2011.

Investor sentiment towards gold has shifted in recent years. The view that the precious metal was primarily a safe haven/inflation hedge appeared to falter as the price rose and concerns mounted that gold was in a bubble, with investors now regarding it as just another risky asset, after all – it is a commodity, and we all know that commodities are risky.

Julian Jessop, head of commodities research at Capital Economics, said: “Since gold is both expensive relative to its own history and provides no income, it is understandable that gold might now look less attractive to investors.”

Furthermore, important macroeconomic factors strengthen a negative outlook for gold price. In particular, a sustained recovery in the US economy could prove worrying for gold bulls as this could increase the likelihood of interest rate rises while making income-paying assets more attractive.

Goldman Sachs and BNP Paribas are among those calling the end of the gold bull market, having recently trimmed their 2013 forecasts to $1,800/oz and $1,865/oz respectively.

Gold supports in place

But despite these concerns, there are a number of reasons to expect gold to perform strongly in 2013 and improve from the relatively weak growth seen over the past year.

The outlooks for the eurozone and Japan are still on the weak side, despite recent signs of improvement. Europe’s financial crisis could flare up again next year if a lasting solution is not found while the fiscal position of Japan is attracting investors’ concerns.

Other issues that could allow gold to hold onto its safe-haven status include continued tensions in the Middle East and extended uncertainty about the US debt ceiling.

Meanwhile, monetary policy appears to be supportive of higher gold prices next year. So long as interest rates remain low and stimulus does not prove so effective it causes markets to anticipate its withdrawal, continued large-scale asset purchases by the major central banks will expand the monetary base and lift inflation expectations, aiding gold.

And while an improving outlook for the US economy would be negative for gold prices, a similar move in emerging markets would be beneficial for the metal. Rising incomes in such nations mean more people are able to afford to buy jewelry, offering a separate source of demand from investors and central banks.

Expecting gold to glitter

Factors such as the above have prompted Capital Economics and other market commentators to offer positive forecasts for gold prices next year.

Capital Economics said gold will reach a peak of $2,200/oz during the second half of 2013, up from its previous estimate of $2,000/oz. Bank of America Merrill Lynch has set a $2,000/oz target on the metal while Deutsche Bank recently raised its gold forecast to $2,113/oz for next year.

Gold has set itself apart from other commodities even though it has few practical uses and no income. Indeed, it can be regarded as another currency alongside the dollar, sterling, the yen and the rest.

We move into 2013 with an improved outlook on many fronts – the US economy, the eurozone crisis, Chinese growth. However, significant risks remain and are well flagged to investors. Because of this, it seems unlikely that 2013 will be year gold loses its shine.