2011-12-28

Gold price slid $13.89, or 0.9%, to $1,594.92 per ounce Wednesday morning

The gold price slid $13.89, or 0.9%, to $1,594.92 per ounce Wednesday morning amid modest declines in the broader commodities complex. Silver fell $0.42, or 1.4%, to $28.85 per ounce alongside the price of gold. Equity markets in Asia and Europe were mixed, while U.S. markets looked to open slightly lower after a worse than expected Case-Shiller housing report.

With the year drawing to a close, several Wall Street firms have recently published their gold price forecasts for 2012. One of the latest to do so was Goldman Sachs, which predicted that the price of gold will peak at $1,900 per ounce and average $1,810 per ounce in the coming year. Goldman attributed its bullish gold price outlook to further net buying by central banks and strong physical demand from investors, the ongoing negative real interest rate environment in the U.S., and continued European sovereign debt and global recessionary concerns.

In its report, the firm wrote that “Our economists’ central thesis is that US real rates will remain low given limited appetite to slow the fragile US recovery or hurt the all-important job growth in an election year. Inflation from non-domestic sources (e.g. imported oil) will also lower US real rates.”

While Goldman Sachs’s forecast was unequivocally bullish for the gold price, the firm did caution that the biggest risk for the yellow metal is further strength from the U.S. dollar. As has been the case in recent months, investors could continue to view gold as more of a commodity than a currency and treat it as a “risk-on” asset class. Nevertheless, Goldman asserted that the large majority of factors influencing the the yellow metal continue to point to higher prices in 2012.

As for gold stocks, the firm had a considerably less positive stance. Goldman noted that gold equities have substantially underperformed the gold price since 2005 due to two key reasons. First has been competition from gold exchange-traded funds (ETFs), which have provided investors with an alternative way to gain exposure to precious metals. The firm pointed out that ETFs currently hold approximately 70 million ounces of gold valued at over $115 billion. In 2011, ETFs have added 230 tonnes of gold and Goldman expects this trend to continue in 2012.

The second factor has been that many gold mining companies have experienced significant operational challenges in recent years. Goldman noted that for the companies it covers, gold grades have declined as much as 50% compared to 20 years ago, royalty and tax rates are considerably higher, and political risks have presented a severe headwind for the sector. Going forward, the firm contended that these factors are likely to remain in place as “capital intensity increases, cost inflation comes through and tax/royalty structures enacted by governments around the world extract more from the mining industry.”

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