Gold closed 2012 with its 12th straight positive year, up 6.5% for the year and up over 510% for the last 12 years vs. a small (8%) gain for the broad S&P 500, a representative measure of U.S. stocks. On the last day of 2012, Gold enjoyed a sharp ($20) rise, as Washington lawmakers waited until the last second, on New Year’s Day itself, to enact a compromise bill, “kicking the spending can down the road” while raising taxes on those earning over $400,000 (single) or $450,000 (couple). On the first business day of 2013, gold added another $15 rise to $1690 early on January 2, 2013.
In August, 2011, Standard & Poor’s downgraded U.S. debt a notch, sending the stock market into a tail spin and pushing gold up to $1900 by early September. In September, 2012, Moody’s warned that it would probably downgrade America’s credit rating if there is no improvement in the outlook for budget deficits. Meanwhile, the third top rating agency, Fitch Ratings, issued a similar warning in November. On New Year’s Day, Washington jumped “halfway” off the cliff by waiting until the last moment to address tax rates and doing nothing about spending. In response, Moody’s said they still have a “negative outlook” on their ratings of U.S. debt, since there has been no “meaningful improvement” on the spending side. This seems good for gold.
Gold 52 weeks ago (December 31, 2011): $1574 Gold’s London Low for 2012: $1537 on May 16
Gold’s price at the start of 2012: $1574 Gold’s London High for 2012: $1792 on October 4
Brazil Doubles Gold Reserves
One group of gold buyers clearly has no misgivings about the future of gold. Central banks around the world, who not so long ago were selling off their gold reserves, are stacking their vaults with the yellow metal now as they become more nervous about the decimation of fiat currency values in the monetary Race to the Bottom.
Though Western central banks have not been buyers, neither have they been big sellers, in contrast to the recent past. Western banks in general already have a hefty percentage of their foreign reserves in the form of gold, so it’s not unusual that they would not be making many new purchases as part of the growing trend.
It’s the emerging nations that see the handwriting on the wall, from Russia and China to South Korea to Iraq and numerous others, central bankers are trading their rapidly sinking paper reserves for the safety of solid gold. Most are Johnny-come-latelies to the gold reserves principle, having trusted in the value of the dollar, euro, and yen in the past. With the folly of that strategy becoming clearer every day, now emerging markets are playing catch-up to realign their reserve portfolios to rely on something more stable in value.
The individual amounts of gold purchases by emerging countries’ central banks are generally quite small in terms of the total gold market, but collectively they are becoming a market force large enough to provide solid price support for gold. The U.S., Germany, Italy and France hold more than 70% of their reserves in gold, according to the World Gold Council. By comparison, the share of gold in Brazil’s reserves, the largest emerging economy after China, is 0.8%. Emerging markets have a lot of headroom to add more gold.
Brazil recently caught gold fever. In November, Brazil expanded its gold reserves for the third month, doubling the country’s gold holdings since August. Brazil added 14.7 metric tons in November, bringing its total gold stash up to 67.2 tons, the most since November 2000, according to the International Monetary Fund.
Iraq joined the gold rush for the first time in years, buying 25 tons of the yellow metal.
Since they have so little gold (by ratio) in their reserves, the world’s central banks represent a significant potential demand for gold in the years going forward.
Credit Suisse Lowers Gold Forecast
Meanwhile, Credit Suisse lowered its forecast target for gold in 2013 and 2014. The cut forecast for 2013 is by 5.4% to $1,740 per ounce, down from $1,840. The Swiss bank also cut its silver price forecast from $33.10 per ounce to $32.20.
The bank’s forecast for 2014 for gold is $1,720/oz., down from $1,750. Silver was cut from $31.40 to $31.30.
“The 12-year-old U.S. dollar gold bull market is not yet dead in our opinion but nor is it in the best of health,” said analysts at the bank.