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Fundamentals Expected to Support Gold in 2013

Release Date: 
Saturday, December 22, 2012

Gold eased this week on improved U.S. third quarter GDP and year-end profit-taking by large investors although analysts noted several bullish factors for the precious metal heading into 2013. Gold was $38.25 lower for the week, settling at $1658 per ounce at 2:15 PM Pacific Time at the New York Spot Market close, while silver was $2.46 lower, closing at $30.06 per ounce.

Bank of America Merrill Lynch said in its 2013 global economic outlook report that the gold price may reach $2,000 per ounce as large-scale policy easing by the Fed and European Central Bank positions gold as a useful hedge against global macro and inflation risks.

Precious metals are predicted to lead returns in 2013, rising as much as 25 percent, a Bloomberg News survey showed. Gold may rally to as high as $2,000 per ounce, according to a median of 49 forecasts, while silver may rise to $40.25 per ounce.

A survey by Kitco shows a majority of participants expect gold prices to rise next week and expect fundamentals to support gold next year. “[M]any said that they are looking ahead into next year already for when markets revert back to trading their underlying fundamentals, such as ultra-loose monetary policy from most of the world’s central banks.”

The weakness in the gold price in the past few weeks has triggered renewed physical buying, particularly in Asia, UBS said in a note.  "Our flows to India indicate above-average demand this week, and in China strong volumes continue on the Shanghai Gold Exchange.

Investors in physical gold are capitalizing on a buying opportunity, pushing physical gold holdings to a new record, according to TD Securities.  Daniel Briesemann, analyst with Commerzbank, said gold investors were bargain hunting on the dips.  Rebecca Patterson, CIO at Bessemer Trust, said recent weakness in gold is creating a great buying opportunity.

Andrew Busch, strategist at BMO Capital Markets, said low interest rates in key economies provide support for gold. "The world knows there's this slosh of dollars, euros, yen that's out there that's very supportive of gold overall."

Some analysts expect gold investors to reenter the market next year after taking profits.  "There has been liquidation ahead of year-end," said Simon Weeks, head of precious metals at Scotia Mocatta.  "Gold's been on shaky ground with the bulls," said Bob Haberkorn, senior commodity broker with RJO Futures. "We're seeing people waiting till next year to get back in," he said.

UBS commented on gold prices after the Federal Reserve recently announced a fourth round of quantitative easing.  "Gold's post-FOMC price action has been muddied by other factors, such as (profit/loss) considerations, as year-end nears and uncertainty regarding the U.S. fiscal cliff lingers," UBS said.  “Gold net longs were little changed,” the bank noted, “nevertheless, it cannot be ignored that, at least in the near term, investor confidence has taken a hit.”  According to UBS, “the subdued spec activity is a testament to the market's growing lack of appetite to take any large positions closer to year-end."

A number of nations increased their gold reserves for a third consecutive month in November including South Korea, Brazil and Russia. During the third quarter, central-bank purchases accounted for about 9% of global gold demand, according to the World Gold Council (WGC).  Central banks bought 373.9 tons of gold in the first nine months of the year and full-year additions will probably be at the bottom end of a range from 450 to 500 tons, the WGC said.

“Central banks, particularly in the emerging economies, are looking to increase the proportion of gold in their reserve assets,” said Alexandra Knight, an analyst at National Australia Bank Ltd.  “That will drive prices of gold because they can be quite significant purchases.”

Japan elected a new prime minister in a landslide victory on Monday.  Shortly after the election, the Bank of Japan announced its third round of monetary stimulus on Thursday, expanding its asset-buying and lending program by 10 trillion yen ($119 billion) to 101 trillion yen.  Prime Minister elect Shinzo Abe said he wants the central bank to employ "unlimited easing measures" to achieve a 2% inflation target.

Analysts at Commerzbank say the Japanese election is among the factors that are positive for gold.  “There are signs that the current price weakness is not sustainable ... and we envisage prices climbing significantly again in the medium term. Yesterday’s election in Japan, for example, is likely to have far-reaching consequences,” the bank said.

Pension funds in Japan are starting to invest in gold for the first time to soften the effect of possible market shocks. Japan’s money managers are concerned that higher inflation could drive up interest rates and erode the value of the Japanese government bonds in which pension funds have invested most of their money.  "Responding to inflation is becoming [an] issue," said Hiroaki Nakaoka, of State Street Global Advisors in Japan. 

(Sources:  “Brazil Doubles Gold Reserves as Central Banks Buy Bullion,” Bloomberg, December 21, 2012; “UPDATE 3-Iraq adds to gold reserve, 1st time in years -IMF data,” Reuters, December 21, 2012; “Comex Gold Ticks Higher After Three-Month Low,” Wall Street Journal, December 21, 2012; “Under pressure from Abe, Bank of Japan boosts stimulus again,” Reuters, December 20, 2012; “PRECIOUS-Gold below $1,650/oz, down 1.3 pct on fund selling,” Reuters, December 20, 2012;“Gold Futures Decline to Lowest Since August on U.S. GDP Report,” Bloomberg, December 20, 2012; “Gold, silver futures sink as fiscal talks stall,” Marketwatch, December 20, 2012; “PRECIOUS-Gold steadies above 3-1/2-month low as stocks rise,” Reuters, December 19, 2012; “Gold Ends at Three-Month Low,” Wall Street Journal, December 19, 2012; “Gold Futures Pause After Steep Downdraft,” Wall Street Journal, December 19, 2012; “Gold Tumbles on 'Cliff' Talk Hopes,” CNBC, December 19, 2012; “PRECIOUS-Gold steadies above 3-1/2-month low as stocks rise,” Reuters, December 19, 2012; “Gold Ends at Three-Month Low,” Wall Street Journal, December 19, 2012; “Gold Futures Pause After Steep Downdraft,” Wall Street Journal, December 19, 2012; “Gold Tumbles on 'Cliff' Talk Hopes,” CNBC, December 19, 2012; “Japanese Pension Funds Seek Safety in Gold,” Wall Street Journal, December 18, 2012);  “PRECIOUS-Gold steadies as US budget talks progress lifts stocks,” Reuters, December 18, 2012; “Gold Gains as U.S. Budget-Deal Optimism Spurs Commodities,” Bloomberg, December 18, 2012; Gold revisits $1,700 before backing off,” Marketwatch, December 18, 2012; “PRECIOUS-Gold steadies, U.S. fiscal fears in focus,” Reuters, December 17, 2012; “Gold Erases Loss as N.Y. Factory Slump Signals More Fed Stimulus,” Bloomberg, December 17, 2012; Gold remains below closely watched $1,700 mark,” Marketwatch, December 17, 2012; “Gold could rise to $2,000 per ounce in 2013: BofA Merrill Lynch,” Commodity Online, December 12, 2012; Higher Prices For Gold Expected Next Week – Survey Participants.” Kitco, December 21, 2012)

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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