Why gold could lose its glitter in 2012

The bloom is off the golden rose.

Investors who have recently jumped on the gold bandwagon will need plenty of patience this year, as the anemic global economy and better prospects for the U.S. dollar combine to dim gold’s allure.

While buyers are likely to see their gold holdings rise in value for a 12th consecutive year, any advance is expected to be more modest than in recent years.

Muted returns from gold would test short-term traders. Yet those who own gold as a long-term answer to currency concerns and for portfolio diversification could find their patience is rewarded. Investing in gold-related companies is also a reemerging trend.

“I don’t think (gold) will be the slam dunk that it has been,” said Jay Feuerstein, chief investment officer at 2100 Xenon Group, a Chicago-based managed futures fund. Short-term gold speculators are likely to have a tougher time with the metal this year, he added.

Dollar disciple

The absence of catalysts to drive buyers to gold is affecting both demand and price.

Gold ended at a record $1,891.90 an ounce last Aug. 22 as talk of additional quantitative easing from the Federal Reserve reached a fever pitch. But gold is down about 15% since then, closing Thursday at $1,647.70 an ounce. Prices fell 10% in December alone.

Still, gold managed a 10% gain for 2011, much better than the Standard & Poor’s 500-stock index , which finished the year flat on a price basis.

Large and small investors alike have cut gold positions over the past year. Holdings in SPDR Gold Trust , the largest exchange-traded fund backed by gold, offer a good picture of the fund liquidation that has taken place in recent months.

The ETF’s gold holdings have remained around 1,250 metric tons for most of December and so far this year, but that’s still a 2.4% decrease from December 2010, when the fund had 1,281 metric tons. Holdings jumped 13% in 2010.

Gold investors have seen no signs that the Fed will ease anytime soon, while the euro zone debt crisis has taken the euro down several notches.

European headlines still impact gold futures, to be sure, but increasingly the metal has traded on U.S. dollar moves.

The dollar is seen as firming this year as the U.S. economy shows strength relative to other developed nations.

Portfolio hedge

If significant short-term gains are not in the cards, gold still has a supporting role in a balanced portfolio, Feuerstein said. Gold is a hedge against inflation and currency fluctuations, he added, though he recommended having no more than 5% of one’s portfolio tied to gold.

Feuerstein sees gold ending 2012 not much beyond $1,700 an ounce, with some peaks and valleys along the way but mostly staying under the dollar’s thumb.

That said, support for higher gold prices is rooted in Europe’s unresolved debt situation and ongoing concerns about the heath of European banks, Feuerstein said.

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Tags: Gold analysis, gold forecast, Gold future prices, Gold futures, Gold investment, Gold news, Gold price, gold price 2012, gold price forecast, Gold prices, price of gold, Spot gold, Spot gold price

Posted by admin on Jan 14 2012. Filed under Gold predictions. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry