Gold price has risen for 12 consecutive years since the end of 2000, positioning the yellow metal as one of the longest-running bull markets in history. Gold prices started 2012 at US$1,531 per ounce and by December 31st closed the year at US$1,657 per ounce. Despite gold’s lacklustre performance it still delivered a positive gain of 8 per cent from the beginning of 2012.
At the start of 2012, some market participants forewarned that gold’s performance was likely to be more moderate than in the past – and it was. For a market used to a 17 per cent year-on-year gain, a single digit percentage increase certainly made it feel like a bear market at times. Interestingly, gold’s biggest monthly rise was in January when gold returned 11 per cent. Growing economic uncertainty and major news events such as QE3, the US presidential election and the fiscal cliff; all had an impact on precious metals. As we turn the calendar over, the question concerning many investors now is – how will gold price perform in 2013?
Every healthy bull market goes through periods of consolidation and gold is no exception. Given the extent of the 2008 to 2011 super-charged rally, the fact prices have consolidated is unsurprising – that’s a natural cycle within any bull market. Looking at the long-term picture, I’m optimistic that gold's bull run will continue. Here are three significant reasons why I believe this bull market still has a long way to go.
Firstly, gold tends to perform positively in times of economic uncertainty. The global economic drivers which have brought the yellow metal to where it is today are virtually all still in place. The uncertainty regarding the US economy, the Eurozone and geopolitical risk in parts of the Middle East are still present and are likely to persist throughout 2013.
The fiscal cliff may have come and gone, however the US now faces an even bigger issue – the debt ceiling. In a nutshell, the debt ceiling is the maximum amount that the US is allowed to borrow based on the limit set by Congress. Currently the limit is US$16.4 trillion, which the country hit on the last day of 2012. As of today, the US debt load stands at exactly US$16,452,329,914,255, according to the U.S debt clock website.
Decision makers have six weeks to close a deal on the debt limit. A failure to do so, could mean a default on US debt – a similar situation that led to the US credit downgrade in 2011. This of course sent gold prices rallying to US$1,921 per ounce shortly thereafter.
Secondly, central banks will play a pivotal role in determining gold’s performance in 2013. Last year, central banks switched from being net sellers of gold to net buyers. The most active buyers were emerging market economies. In the first nine months of 2012, central banks in emerging markets bought a total of 500 tonnes of gold – up from 465 tonnes in 2011. In the Middle East, that included the central bank of Azerbaijan, Kazakhstan, Iraq and Turkey. This trend is likely to continue into 2013 and will certainly have a positive impact on prices.
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Thirdly, global gold demand is also an important factor to consider. Demand for gold is widely dispersed around the world. China, India and the United Arab Emirates account for approximately 65 percent of consumer demand and that figure is projected to increase this year.
Chinese inflation data released last week showed positive signs that, the East Asian economy is bottoming out and beginning to recover again. Along with it, Chinese gold demand is estimated to grow around 10 percent this year from about 800 tonnes in 2012, according to The World Gold Council.
India’s imports have more than doubled in three years and investment demand has climbed almost fivefold. All this occurred while prices were rising, which barely even caused a slump in India’s demand. This trend will continue and may even strengthen.
In Dubai – the world's leading precious metals hub, gold is now the Emirates second bigger export earner after oil, according to the DMCC. This trend is likely to continue as long as there is demand from India and China. Dubai has 29 per cent market share of global gold trade with nearly 1,200 tonnes – worth about US$41bn changing hands. That's up from around US$6bn worth traded in the Emirate in 2003.
In conclusion, there remains a multitude of factors that will influence gold prices in 2013 and beyond. Despite the recent price distractions, nothing has really changed. The global economic issues, which have brought gold price to where it is today, are far from over and still persist. Looking ahead, gold will require more patience than it used to, but prices have plenty of reason to soar in the long-term.