Over the long term, the bubble may burst if central banks raise interest rates, but in the short term, analysts remain bullish.
Major currencies of the world are under stress, commodities have corrected on fears of a slowdown in global growth and bonds of several euro zone governments are under stress. All these uncertainties should definitely spell good news for the yellow metal. Over the next 12-18 months, gold should do well against several other asset classes, believe most commodity analysts.
There’s plenty of interest in the precious metal, thanks to the sterling returns it has delivered compared to other asset classes. Gold has returned 13.2 per cent each year from 2000 to 2008 and a noteworthy 25.5 per cent in the last three years.
Given the turmoil in some of the major economies of the world, it’s likely that real and nominal interest rates low, which will support higher gold prices. Another factor that drives gold prices is the demand from investors. According to Citigroup Global Markets, gold has seen an unprecedented amount of financial demand from both retail investors and central banks, seeking a safe-haven against other asset classes. Given the high level of market uncertainty and continued turmoil from the euro zone crisis, this financial demand should continue into 2012.
Citi’s global commodities strategy team expects gold prices to remain firm in the near term. It forecasts average nominal gold prices of $1,575/oz for 2011, $1,950/oz for 2012 and $1,744/oz for 2013. The big question is if the rally would sustain? Gold corrected rather drastically in September, falling by over 15 per cent in the international markets from $1,900/oz to $1,600, sparking fears that the spectacular rise would not continue. However, analysts believe that once macroeconomic conditions stabilise and real interest rates begin rising, gold would likely correct violently. But it’s not going to be easy to time the bubble’s bursting, as this asset is subject to factors other than market conditions. Citi pegs the metal’s long-term forecast at $1,050/ounce.
