The perception of gold as a safe haven investment will likely be further eroded in 2012, predicts Dominic Schnider, Head Commodity Research at UBS Wealth Management
Overall, what is your commodity investment forecast for 2012?
The risk-reward for broadly diversified commodity investments remains unattractive in the short run. However, we expect prices to bottom out in late 1Q12 or early 2Q12, with the second half of 2012 delivering solid positive returns.
Will gold be a 'safe haven' this year?
Gold should preserve investors' wealth, but it has always come with a certain price risk. The metal has had volatile episodes, for example in 2008-2009. In the third quarter of 2011, gold was up almost 50 per cent year-on-year. Since then, this uptrend appears to have stalled, with daily price drops of up to five per cent because the speculative community in particular started to sell gold to beef up liquidity. Poorly performing assets in their portfolios, such as equities, left many investors no choice. Moreover, stress in the banking system can be a burden for gold. In an environment of high liquidity needs, gold tends to weaken and provide investors with little protection. In the absences of liquidity injections by the ECB [European Central Bank], this could intensify in February, March and April this year. Many government bonds in the Eurozone will expire and need to be refinanced. In that context, we expect Greece to default. The chances that high debt levels in the developed world will be solved by austerity alone is highly unlikely. Debt monetisation remains a key policy tool of choice. Gold is increasingly viewed as an alternative currency rather than a commodity. With the US dollar and Euro having structural problems that put both currencies at risk to weaken, we think gold's real asset character will remain in high demand.
What are the principal risks for gold in 2012?
We predict there will be an additional 100 tonnes supply of gold this year, almost four per cent up on 2011. This requires firm investment and central bank demand. Last year central banks, particularly those in emerging countries, became net gold buyers, purchasing 450 tonnes. If central banks do not keep up their purchases, financial demand might be insufficient to clear the market.
What are your gold price forecasts for 2012 and beyond?
Our 12-month forecast is $2,200/oz. We forecast a yearly average of $1,900 for 2012, against $1,573 for 2011 and $1,235 in 2010. Negative real interest rates are long-term price drivers for gold. As long as investors are not adequately rewarded on their bank account, the search for real assets should push gold prices higher.
What is your outlook for gold mining stocks?
Gold mining stocks disappointed during 2011 compared to the price strength seen in gold. This fits the historical risk reward payoff for gold mining equities. The high volatility of gold mining stocks has poorly rewarded investors, especially versus physical exposure to gold. Rising production costs suggest higher gold prices, but they can also cut into margins. Therefore long-term we would rather stick with real gold. That said, from a tactical perspective, gold mining equities have an attractive asset valuation, which should allow them to make up for some lost ground in the coming quarters.
What is the most attractive metal investment at present?
There is greater value in platinum than gold, which is trading at a discount. This is in itself a very rare situation. One reason is that platinum demand is tied to industrial activity, which has shown signs of weakness. In addition jewellery demand has failed as yet to make meaningful advances to compensate industrial demand shortfalls. With platinum and gold moving averages crossing, we expect jewellers to lower prices for platinum jewellery. The volume of platinum mine output is a fraction of gold and is also produced at a higher cost.
Demand for platinum in jewellery is expected to pick up, especially in China, which is the world's most important platinum jewellery market. Platinum is also used in catalytic converters for diesel engines, where Europe is the main consumer.
In 2011 202 tonnes of platinum was produced, compared with 2,900 tonnes of gold. If just one per cent of global demand for gold jewellery shifted to platinum, roughly 10 per cent of all platinum mine output would be absorbed. Against this background, we do not believe platinum prices will fall unless the South African currency plummets in value.
© The Gulf 2012
