Gold Price Forecast For 2012: A Rise Seems Likely, But It's Not Guaranteed

Includes: MDW, PZG
by: Timothy Woods

Gold prices have been rising steeply since 2007, a climb that shows no sign of abating according to market analysts.

Why will gold prices continue to rise?

Firstly, gold has always been an inflation hedge in uncertain economic times. It is no coincidence that prices have risen so steeply since around the beginning of the global economic crisis, compounded by the 2011 European debt crisis. As long as the U.S. dollar is weak, investors are more likely to invest in tangible assets such as gold or silver. In addition, the political unrest in North Africa and now, Middle Eastern countries such as Saudi Arabia has had an upward effect on the price of gold.

Investors inevitably look for a secure investment amid such uncertainty and thus turn to gold. The steep climb of its stock prices' rises in recent years has undoubtedly been aided significantly by market reaction to the global economic crisis.

Secondly, the rise of gold stock prices over the last decade is tied directly to the industrialization and emergence of China, India and Brazil as powerful global economies. What was not expected, however, was the rate of price increase, rising much more sharply than was widely anticipated. The recent slump in Indian demand for gold has not really affected global demand as China has increased its imports on a massive scale, soaring to 891 tonnes in 2011, displacing India as the globe´s biggest consumer.

Industry leaders´ forecasts

At the time of writing, gold´s price was $1,745 per ounce, a rise of 12% since the beginning of this year. HSBC has predicted that average gold price will be $1,850 for 2012, citing a "shift away from eurozone sovereign debt to the U.S. and its fiscal problems in an election year" as key to stimulating investor demand for gold. Northern Securities mining analyst, Matthew Zylstra, has predicted that it could hit $2000 this year, a prediction shared by Barclays and UBS.

Some gold stocks that performed well last year are widely predicted to do as well in 2012. Paramount Gold and Silver Corp. (NYSEMKT:PZG) is being tipped in some quarters to hit between $3.50 and $4.00 per share, currently trading at $2.72. Midway Gold Corp. (NYSEMKT:MDW) is another widely tipped stock for the year. At the time of writing, it was up 3.55%. These are two gold stocks investors looking at the precious metal should seriously consider.

Over the next ten years or more, metal prices are expected to remain high. This is mostly due to increasing demand from countries undergoing intensive levels of urbanization and infrastructure building. In particular, China and India will drive up the cost of metals across the board.

Though it is highly likely that gold´s price will rise in 2012 substantially, 2011 showed that gold, long seen as a safe haven for investment, has a volatile side, falling to $1,500 in September. It may no longer be the guarantee in uncertain economic times that it traditionally has been. Who, after all, would have predicted the recent drop in the U.S. unemployment rate? Even though this only affected gold´s price adversely by 0.5% it goes to show that we really do not know what can happen.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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