Will gold bounce back to its safe haven status in 2012?

Last year was an eventful one for the Gold market. The yellow metal was up 10 percent in 2011 for its 11th consecutive annual gain. But despite making an all-time high on Sept. 5 at $1,900/oz. gold finished the year down 18 percent from that high.

Gold entered a bear market in late 2011 which was confirmed by gold’s closing below its historically significant 30-week moving average. This doesn’t happen very often which indicates the technical significance of the event. The last time gold violated its 30-week MA was in 2008 during the credit crisis and it hasn’t happened since then as you can see in the following chart.

A violation of the 30-week MA doesn’t tell us how long the bear market will last or whether it will result in significantly lower lows. It only tell us that bear market conditions are underway and to be wary of market conditions as long as the gold price remains under this important moving average.

Gold and Silver have both been under pressure ever since a series of margin requirement increases by the CME in 2011. This ran out the speculative element among retail traders and it also discouraged hedge funds from running the metal prices higher. Savvy market veterans saw this move coming. George Soros, the billionaire hedge fund guru, reduced by 99 percent his holdings of the yellow metal in the first quarter of 2011. Top hedge fund manager John Paulson also sold gold last year according to exchange data.

The rationale behind gold’s slide in the last four months of 2011 is the ongoing concerns of investors concerning the financial crisis in Europe. This led to a large scale selling of assets, including gold and silver, in a concerted bid to raise cash. The demand for cash in the final months of 2011 was reflected by the rally in the U.S. dollar index, which established a short-term uptrend in the months of November and December

As we saw most recently in 2008, credit panics always result in liquidation and even the traditional safe haven of gold isn’t immune from such financial shocks. Cash is king in a deflationary crisis as everything that can be converted into dollars is sold. The European debt problem hasn’t degenerated into a full-fledged collapse yet, however, so it’s clear that investors have been premature in liquidating hard assets. Perhaps this is a case of investors remembering the pain of 2008 and avoiding the yellow metal on the assumption that the coming months will witness a repeat of the credit crisis of ’08. Regardless of the reason, Gold and Silver haven’t yet benefited from the problems in Europe and instead investors have bypassed the precious metals and have flocked to the dollar.

Geopolitical and economic concerns aside, the best chance for a metal and mining stock recovery in 2012 is for a rebound in monetary liquidity. Some analysts are optimistic about gold in 2012, in anticipation of a boost to the metal’s demand from bond buying measures by the U.S. Federal Reserve and the European Central Bank. The median estimate in a Bloomberg survey of 44 traders and analysts is for gold to rally as much as 37 percent in 2012 to $2,140 an ounce. This may be an overly optimistic assessment, however, especially if the eurozone crisis escalates in the months ahead.

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Posted by admin on Jan 16 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