A large number of visitors to our website at www.SharpsPixley.com have written in asking why we have put such a modest increase in the LBMA gold price forecast for 2012.
It could be said that over the last 10 years my forecasts have consistently stood very much toward to the top of end of price expectations — much at odds with other LBMA members forecasts. This position has put me in very good stead. This year we revert to the mean — with a forecast of an average price for gold of $1,765 — while the consensus amongst the other forecasters is $1,766. Why ?
Fundamentally we believe gold remains a very solid investment — supported by but not driven by good supply / demand factors — but it has been a long time since these have been drivers of sentiment. Our caution can best be likened to digging a hole in sand — you can go so far before the sides start to gently collapse on you and you can only go deeper by going wider. In gold terms it seems that gold can only sustain rally for so long before the temptation to take profit becomes overwhelming and it diminishes the ability to rise exponentially... a victim of its own success if you like, much as we saw in the latter stages of 2011.
Our caution (if that's what a 10% y-o-y gain can be called) also is based on the probability of a gain in the US dollar — yes, in a former article we described the dollar as the nicest horse in the glue factory — but there is a sense here that the US has the greatest chance amongst advanced economies (in our view) of resolving economic confidence through jobs creation and the support of its MBS market, which will lead to growth. As such, we favor the dollar over other leading currencies, which should place a drag on runaway commodity prices.
Gold has scored some pretty phenomenal gains over the last decade and we expect that history will write that it performed its role as a preserver of wealth admirably during this period. That history will not be written for a few years yet (probably three to six years) by which time it will have peaked at a little over double the current price by our estimates.
Like so many things, it’s not so much the price level, but the manner of getting there that matters. Periods of retracement and consolidation confer significant strength to the bull-run in the same way that a moment to reflect on the other side of the argument confers greater weight to the opinion expressed. In the early 1970's gold saw a number of such periods of doubt before an explosive rally at the end.
Gold bulls may be dissatisfied with a gain of only 10% on the year — if so, our response would be "be careful what you wish for."
Norman is the owner and chief executive officer of the London-based gold broker Sharps Pixley Ltd.