Will gold prices break down in 2013?

Maybe. But for the first half of the year, things are looking bullish.

By InvestorPlace Dec 10, 2012 1:39PM

Image, Gold Bars copyright Stockbyte, SuperStockBy Jeff Reeves


iplogoMany investors are uncertain about their finances right now for a host of reasons -- the fiscal cliff, the eurozone debt crisis, the corporate earnings recession, yadda yadda, yadda.


That means 2013 could be a breakout year for gold as a safe haven investment. Right?


Maybe -- but on the whole, the arguments for gold go far beyond a simple assertion that it is a "contrarian" investment. And it's important to note that in the second half of the year, we could be faced with a very different environment as data about earnings, jobs and sovereign debt slowly improve.


The upside

Here's the bull case first, focused on the short-term.


Central bank buying: A September report from Thomson Reuters GFMS indicates that central bank purchases will increase to 493 metric tons in 2012, up from 273 tons in 2011. That's a 34% increase. More recently, Bloomberg reported this week that the Bank of Korea increased its gold reserves 20%.


ETF buying: Physical gold remains a big part of many exchange-traded funds (ETFs) out there -- and not just the popular SPDR Gold Shares (GLD) ETF or the iShares Gold Trust ETF (IAU). Consider that as of last week, $1.6 billion in new inflows was added to GLD alone, according to ETFtrends. The accessibility provided by ETFs means that many more investors can practically own gold -- and thus create more demand for the precious metal, sending prices higher.


Emerging-market demand: A Morgan Stanley (MS) analyst, Hussein Allidina, is bullish on gold in 2013 for a host of reasons, but I find this one the most interesting. He writes in a note this week that "the Indian jewelry and investment market is also showing signs of recovery as Indian purchasers acclimate to recent price trends amid restocking ahead of the Indian wedding and festival season." This argument may hold true for China, too, if the so-called "hard landing" there has indeed been avoided and the consumer class continues to improve.


Upside targets: I'm not talking the overhyped "$10,000 gold!" headlines either, but the at least semi-rational ravings of big Wall Street investment banks here. BNP Paribas recently cut its gold forecast, but is still expecting a 10% increase in prices from current levels. And analysts' median forecast for the 2013 year-end gold price has risen from $1,832 as of September to $1,850 currently -- a 9% upside on average. Some, like Bank of America (BAC), expect much higher, like $2,400 an ounce.


Safe haven: If the fiscal cliff isn't resolved and the world continues to face big-time macro risks, gold will be attractive because of its popularity as a "safe haven" investment. If equities are volatile and yields on bonds remain super low, where else can investors turn?


Inflation fears: If you believe low interest rates and high debt levels will result in a weaker U.S. dollar, then you have to believe in inflation for dollar-denominated commodities like gold. It's simple math.


The downside

Gold is not a sure thing, however.


For starters, it's worth noting that gold isn't actually much of a safe haven or contrarian investment these days. As I explored in a recent post on InvestorPlace, correlation is very high right now in the market, and that includes equities and gold performing in kind.


Also, inflation hawks have been beating that drum for a while and hyperinflation has never materialized. Banking on gold because of this trend might not be wise. The dollar continues to hold up, especially as long as the euro remains under pressure, so hyping hyperinflation might not be enough on its own to justify an investment in gold.


And perhaps most interesting, there’s the prospect of economic growth ahead to syphon interest away from gold. A lot of encouraging data is starting to trickle out, including a drop in the headline unemployment rate to 7.7% -- the lowest since 2008. Any uptick in economic growth could make gold lose its luster amid other investment opportunities. While there are fears of an anemic first half to 2013, some experts expect the global economy to get its swagger back as early as late 2013.


All this is worth noting. But the time horizon is crucial here, because some folks who are doubting the staying power of gold are looking to 2014 and beyond -- and in the short-term, the bull case might hold. In fact, Goldman Sachs (GS) just made a big call saying this is the end of the great bull market in gold, as reported by BusinessWeek -- despite at the same time targeting $1,825 in three months, or a decent 90-day profit from current levels of around $1,700.


Related reading

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.


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23Comments
Dec 10, 2012 2:34PM
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The difference between gold and U.S. dollars is that gold is finite and the amount of dollars the FED can print is infinite.

Dec 10, 2012 3:07PM
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The economy and world wide downturn is the indicator for how gold will do in 2013/2014.

world wide paper money is going to loose money, since all the countries will devalue their currency for them to push for exports to other countries to make money. By doing so inflation will creep up and all the basic things for day to day life will go up. pay scale for everyone is not going to go up. for 2013 to 2014 it will be a repeat of 2012. no new money will be flowing. so to keep the economy up all they will be doing is keep the value of money down, interest rates at zero, and inflation will rise slowly. this will lower the purchasing power of individual currency, hence worldwide stagnation of currency. people will see their savings dwindle, lost hope in the system and the only investment which looks better is gold and silver which will be safe which will not loose money for sometime.

              all over the world with devaluation for competing with each other they will print more money to stabilize their economy which will in turn raise commodity prices. stimulus money in infrastructure and building up the economy from within will keep the economy afloat. so for 2013 to 2014 oil will go down but gold and silver will go up.

Dec 10, 2012 2:55PM
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Yes, and Gold can be outlawed to posses and confiscated. This Fascist communist government has everyone by the balls.....with gold traps , dollar traps, bond traps, real estate traps, food traps, inflation traps, deflation traps, food stamp traps, securities traps, IRS traps, interest rate traps,  YOU NAME IT ..! Getting away from these crooks is like the nurse who took a crank phone call from DJ's and you will be financially killed in plain sight and no one to blame except yourself and the Royal family Queen's will call it suicide...!!! Or Fascist Islamic Turkey and now Fascist Egypt fighting for there freedom...!!! YOU THINK YOUR FREE HERE...THINK AGAIN...!! This New world order wants to take over the world......!!! Look at Egypt...!!! First Socialist Medicine with ObamaCare next Have you heard Hugo Chavez or Castro blast the US lately...NO... Why? Because they know whats going on...!! and they are hoping to tear America down.....with our Presidents help...!!
Dec 10, 2012 5:39PM
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Who can  believe Goldman Sachs? Look at the fines they had to pay. Sold toxic mortgages to investors and then shorted them. Ring any bells?
Dec 10, 2012 4:54PM
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Jeff

 

Nothing is a sure thing!

 

And what's slowly inproving? The economy? I think you've been listening to the media too muc....oops you are the media. Go ahead have some more Obozo Kool Aide.

 

I'll keep my Gold and look for more while it's still on sale.

 

Funny you should write this today. Both Gold and Silver are up.

Dec 10, 2012 4:15PM
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The price of Gold is inversely proportional to the purchasing power of average consumers. When Gold was bumping down into the two-hundreds back in the late 90's, mass consumer purchasing power was at probably the highest ever; driveways were choked with boats, trailers, motorhomes, Lexi (multiple Lexus's?) and everyone was salon coiffed and dressed like a Macy's mannequin, while cruise lines, flashy hotels and airlines rejoiced.

After the huge lifestyle meltdown since then, Gold prices have increased in lockstep; current purchasing power has been flat recently, and so have Gold prices. Forget quick jumps or drops in Au; that's manipulation. Look at the smooth curves on year or decade charts - they mirror purchasing power much more accurately than the USDX of a buck.
Dec 11, 2012 1:20AM
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None of the comments mentioned the one big factor: $16 trillion in US national debt and climbing.  America has never owed this much money and the only way the interest will be paid is with fresh paper money.  The rest of the world will drive gold higher in US dollars.
Dec 10, 2012 3:13PM
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Gold has tripled in price in the last 6 years. It costs about $500/oz to produce, yet the price is over $1700/oz. I would not put a dime in gold at this point. It seems more like a Las Vegas condo circa 2006.
Dec 10, 2012 5:49PM
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"hyperinflation has never materialized" Okay, so if there is the great economic boom forecast, you don't suppose that might happen? You don't suppose industrial demand will push up commodities generally?
Dec 11, 2012 12:10AM
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Gold does change in value....Has for thousands of years...But as far as comparing to fiat or specie...

Maybe one in the same..(fiat/specie)...not gold.

From the day paper or coin is minted it could lose due to inflation.? Or even deflation.

 

But by the same token(that is a pun isn't it?) Gold could be completely worthless in some cases.

Because no one had it anymore..

It was all in the hands of a few or one.

Or something became much more valuable then gold.

Right at this time Gold is worth roughly $1700 in US dollars....10 years from now it could be worth $2000 or even $200...IMO. 

Dec 12, 2012 2:29PM
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 If central bank purchases increase to 493 metric tons in 2012, from 273 metric tons in 2011, this is an increase of 58.6%, not 34% as stated in the article.
Dec 10, 2012 7:52PM
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Good point...Iron Mike, but you can find some Companies(miners) bringing Gold to Market for under $400 per troy, yet....They can make you a little money even at $1700 per/t.

 

Industrial demand will raise all boats in Commodities, Realist8...But usually Gold doesn't ride that wave as well as maybe Silver and better yet copper/nickel/iron/steel ?? Coal and oil/Ngas.

Dec 10, 2012 5:27PM
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I thought the same thing in or 2011-12.....It pretty much stagnated, not like it used to be when you could play some cycles...

There have been a few highlights, but not many the last 12-18 months and I was right..

Didn't listen to myself....But still try and bring buy-in down DCA, so we are not getting hurt..

But without inflation or some other factors rearing their ugly heads...We are in for the same shidt.

If I get 15-20% gain this time...I'm probably gone for awhile...

Long term HOLD on Gold...Is not a good investment....It has to be traded, PERIOD.

But today we only about 30% of what we used to work with...

Come on, GoldBUGs give me a leg up.

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