Gold To Hit Historic Highs In 2013 On Fed QE, But Its 11-Year Rally Is In Jeopardy

While experts may disagree on how much longer gold's rally will last, one thing they do agree upon it that gold will hit historic highs in 2013 due to the Fed's continued quantitative easing programs. Many investors look to gold to diversity their portfolios and use as a safe haven investment.

Agustino Fontevecchia
12/17/2012 @ 4:23PM
Forbes

Gold has divided the analyst community through this volatile 2012, with some, like Goldman Sachs, calling for the end of its decade-long rally, while others expect it to average $2,000 an ounce by the end of next year. There’s one thesis that has built consensus, though: gold is set to rally in the first half of the year as a result of the Fed’s latest round of quantitative easing, possibly to fresh all-time highs.

Gold has always been a divisive asset class, sparking intense debates between gold-bugs and those that call them fear mongers. This year, the yellow metal surged to early highs in the first quarter, only to completely break down along with risk assets as the European sovereign debt crisis intensified and China slowed down. Gold then rose again coming into the third quarter, as Mario Draghi pledged to save the single currency, only to gradually decline throughout the fourth quarter, as investors liquidated positions and moved into cash ahead of the fiscal cliff.

“Going to cash is never bad if it’s short-term,” explained George Gero, commodities expert at RBC Capital Markets, who expects gold to continue its ascent in 2013. Central bank printing, with the Federal Reserve, the Bank of England, and the Bank of Japan engaged in quantitative easing, and the ECB ready to purchase sovereign debt, is set to continue eroding the value of rich-country currencies, which in the face of it is supportive of gold prices.

Bullion, or physical gold, has increasingly taken on a monetary role, trading sometimes as a safe-haven in times of global volatility and in others as an inflation hedge. Central banks, for example, became net buyers of gold in 2011 after 20 years selling the precious metal, World Gold Council data showed. Interestingly, major producers like China and Mexico have been responsible for a lot of the buying as they sell U.S. dollars to diversify their reserves, Gero explained. In 2012, the price of physical gold has been the mirror image of the greenback, as measured by the dollar index.

Goldman Sachs’ research team agrees a weaker dollar will support gold next year, recently calling for gold to hit $1,825 an ounce over the next three months. Last week, the Fed Chairman Ben Bernanke laid out his plans for what has come to be known as QE4: the Fed will buy $85 billion in mortgage-backed securities and Treasuries a month until they see a substantial improvement in labor markets. A weak U.S. economy in the first half of the year, modest dollar depreciation, and continued easing should put upward pressure on bullion.

Gold prices have risen consistently for the past 11 years, but Goldman’s team is ready to bet the trend will end in 2013. After peaking around $1,825, bullion should fall to $1,805 over the next six months, and then to $1,800 by the end of the year. In 2014, the yellow metal is forecast to average $1,750. Goldman’s team seems to trust that Ben Bernanke’s intense money printing, along with low inflation, will have a positive effect on output, with GDP growth accelerating in the second half of 2013. This in turn would lead to higher real interest rates, with 10-year Treasuries yielding 2.2% by the end of the year, and thus to lower gold prices.

The general opinion is mixed on the full year is mixed. Some, like BNP Paribas, expect gold to hit new highs next year and to extend its rally to 2014 as the bull-trend reverses; they see bullion averaging $1,780 in two years. At the other end of the spectrum is Bank of America’s research team, which estimates gold will average $2,000 in 2013, and then continue its rise to $2,400 by the end of 2014 on strong demand from China. Barclays’ analysts take a more moderate approach, trimming their 2013 estimates to $1,815 an ounce as the greenback gradually appreciates.

Beyond exchange traded funds and physical bullion, investors can play gold through the gold miners. The Market Vectors Gold Miners ETF has substantially underperformed both physical gold and the general stock market this year. Famous investors like Greenlight Capital’s David Einhorn and John Paulson have owned gold equities for quite some time, with both billionaires holding Barrick Gold, according to their latest regulatory filings. Paulson also holds other names in the space including Angolgold Ashanti, Novagold, and Randgold. Gold equities look cheap from a valuation basis, given the incredible rise in the price of the precious metal over the past decade, but have suffered from rising mining costs and labor unrest.

Whatever happens, 2013 is setting up to be an historic year for the yellow metal. Continued Fed easing could push gold to new all-time highs, but the possibility of a stronger U.S. recovery in the second half of the year could put an end to what has been one of the most lucrative trades of the past 10 years. Investors will have to keep a close eye on fundamentals.

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