Outlook for Gold Prices Is Bullish in 2012

Gold prices have fallen 16 percent since reaching a record $1,900 an ounce - and could fall further in the near term. But many analysts predict gold prices will rise, perhaps to new records, in the latter half of 2012.

What is it with gold? Spot gold prices soared to a record above $1,900 an ounce in early September, dipped below $1,600 late in the month, rebounded strongly, and then fell below $1,600 again last week. That's a 16 percent decline in three months, although the shiny metal is still up for the year. Will the decline continue into 2012?

It could. Concerns about the euro debt crisis have sent investors scrambling to buy dollars as a haven from risk, rather than gold, which has caused the dollar price of gold to fall. When gold prices fell below their 200-day average last week, a technical sell signal, prices broke below $1,600 although they have recovered a little since then.

"What is surprising is that in an environment where headline risk news is bigger than ever, gold has actually fallen from its highs," Christoph Eibl, CEO and founding partner of the Swiss commodity hedge fund Tiberius, told Reuters.

With the euro debt crisis virtually certain to extend into the new year and the US economy still weak, keeping inflation tame, many analysts see gold prices could fall further. Yet, they do not anticipate any precipitous fall since gold serves as a kind of ballast to market volatility and as a store of value.

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From Dollar to Monsoon: Factors That Affect Gold Prices

Gold prices have fallen from dizzying highs on global cues. HT explains the factors that influence its prices and its linkages to the dollar and monsoon in India.

Why do people invest in gold?

Gold is one of the several assets that people invest in. Unlike equities or bank deposits, gold is a physical asset and has been a traditional favourite for parking surplus income.

How are gold prices determined?

Gold is considered to be a safe haven asset. In times of high inflation and volatile stock markets, gold prices usually tend to go up. Its price had more than doubled from early 2009 to end of 2013 as investors in Europe and the US flocked to add more glitter to their investment portfolio rather than park funds in unstable and risky equity markets.

What triggered the fall in gold prices on Monday?

There were reports of massive selling of gold in China on Monday. According to some reports, more than 30 tonnes of gold were sold in the Shanghai spot market on Monday. The heavy selling triggered global prices to fall sharply.

What is the relationship between dollar value and gold prices?

Under normal circumstances, the value of the US dollar and price of gold are inversely related. A stronger dollar usually makes gold cheaper. This is because international prices of gold, like many other commodities, are denominated in dollars. If the dollar strengthens, it makes such commodities expensive in the other currencies. The resultant fall in demand sets off a fall in prices.

Why is the dollar strengthening against a basket of currencies?

The US Federal Reserve has hinted at the possibility of interest rate hikes this year, the first time in nearly a decade. Analysts expect the first rate hikes to come in by as early as September.

What does an interest rate hike mean for the dollar?

An interest rate hike in the US could trigger a dollar flight from emerging countries such as India. A rate hike in the US will encourage foreign, particularly US-based funds, to move money out of India to safer locations closer home. Global funds park money based on expectations of yields.

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