Eurozone crisis still points to higher gold price

Some of the sparkle has gone out of gold and its fellow precious metals since the excitement of August’s record highs.

The gold price has fallen from over $1,900 to $1,620, silver is down from $44 per ounce to $29, while Platinum has dropped to $1422 from over $1900.

Given that few, if any, of the problems that drove up prices earlier in the year have gone away, and in many cases have deteriorated, these falls are hard to explain.

The good news for 2012, for gold bugs anyway, is that the eurozone is still on the brink, governments are printing money to sort the problem and interest rates are still low or negative in real terms.

Against this background few observers expect gold to fall much further while many now predict a rally and for it to drag its little brother silver up with it.

Broking heavyweight Goldman Sachs expects gold to average $1,810 over 2012 and to peak at over $1,900. 

The US firm says little on the macro front has changed going into the New Year with low interest rates and ongoing concerns over the eurozone likely to keep demand for the metal high.

Citigroup is more bullish and recently increased its 2012 gold price forecast to an average of $1,950. 

That upgrade it says was to reflect the impact that all of the global financial tension is having on the metal now and “probably will have for the next 12 months”, though the broker expects some of the global problems to ease going into 2013.

It says the main risk to its forecast is that investor fears over sovereign risk peak earlier than it has assumed.

In those circumstances, jewellery demand may not be strong enough to absorb the heavy sales of physical bullion from exchange traded funds (ETFs) that might accompany any improved outlook for debt-laden economies.

Giant hedge fund Paulson, for example, recently revealed it had sold a large chunk of its holding in SPDR Gold Shares, the largest gold ETF.

An increase in buying gold by central banks may take up some of any ETF slack. Central banks are tipped to buy a fifth of gold production this year.

The growth of ETFs has been a key development for the gold price and Goldman Sachs believes they will continue to have an impact, particularly on share prices of the gold miners that have seen their role as proxies for the gold price usurped by the new instrument.

Goldman believes that widespread ETF availability, and easy access to physical gold and poor delivery by the companies themselves, means mining shares will continue to underperform the gold market.

It argues investors in miners should focus on special situations, such as companies with low costs and those growing their resource base.

Egypt-based Centamin (LON:CEY) is one of Goldman’s conviction buys, but Citigroup, though still a buyer, recently downgraded its price target because of the political unrest in the country from £1.67 to £1.23.

Major gold groups RandGold Resources (LON:RRS) and AngloGold Ashanti have run too far ahead after strong gains recently, says Goldman.

For silver, the sector is dominated by Mexican miner Fresnillo (LON:FRES). Its performance has mirrored the silver price, dipping from over 2040p at its peak in August to 1528p currently. 

Traditionally silver has enjoyed a strong correlation with gold, but its heavy use in industry in a number of products such as solders, numerous electronic products and in batteries allied to fears over a global economic slowdown has seen that relationship weaken in recent months.

The market is also not as liquid as gold, but if gold rallies tradition suggests silver will follow.

Platinum is also closely linked with industrial use and like silver has underperformed gold recently. 

In fact, the metal hit a 26-year relative low versus gold earlier in December.

Fears about industrial growth may be behind that. While highly prized in its own right for jewellery, Platinum forms the basis of the catalytic convertors used in cars to reduce exhaust emissions.

London-listed Johnson Matthey (LON:JMAT) is one of the largest Platinum refiners and suppliers of car exhausts. 

It has been cautious in recent statements about car production in 2012, but has seen its share price rally in recent weeks. And while it may only be a small straw it does give Platinum price watchers something to grasp.