It can be said that 2011 has been a very turbulent year. As we look back at worldwide protests, Japan’s struggles, inflation and the European debt crisis many investors turned to gold as a safe haven. As a result gold reached an all-time nominal high in September of just over $1,900 per ounce.
When protests erupted in the Middle East investors turned to gold and silver. The prices rose dramatically, especially in silver (up to $49/oz) and then pulled back in the summer. It rose too far, too fast. Then as the European debt crisis took hold gold surged again rising to a new all-time high. Gold has since pulled back again but is still up $350/oz from a year ago, over a 25% 1-year gain.
Some factors will affect the gold price moving forward
Typically when interest rates are low, gold and other commodities prosper. A lot of this has to do with investors chasing higher returns since treasuries and other savings instruments have low yields. With the Federal Reserve promising low rates at least until mid-2013 this trend for gold should continue.
Central Bank Reserves
As central banks continue to replace dollars and other reserves with gold, supply and demand factors will continue to contribute to gold’s rise. Gold’s demand rose 6% in Q3 as compared to supply growth of just 2% in Q3, while central banks added 148 tons of gold according to the World Gold Council (WGC). Globally central banks added 1,054 tons in Q3 valued at $57.7 billion, an all-time high. Central bank demand seems to be getting stronger with more of these central banks entering into the market, which bodes well for gold.
According to the WGC, third quarter investment demand rose 33% to 468 tons and European investment demand grew 135% during the same time. Investment demand continues to look strong as the Chinese government is encouraging its citizens to purchase gold as an inflation hedge. Records are being set for investment demand worldwide and with all the calamity we don’t suspect this will change.
Jewelry demand in China and India has increased in the third quarter and many retail chains have opened more stores in response. The Indian wedding season occurs during this time of year, and the gift of choice is gold. This tends to contribute to gold’s strong numbers in Q4.
These factors as well as others have many analysts predicting that gold will reach $2,000 to $2,500 per ounce next year. Given gold’s track record of 18% per year on average since 2001, $2,100/oz would be right on target from today’s price of $1,740.