By MoneyMorning.com.au
2011 was a long, painful year for nearly everyone in the market – with perhaps the exception of gold bulls.
Even the self-appointed kings of the financial sector, the hedge funds, were put out to dry.
The ‘hedge’ part of their name alludes to their investing methods which let them ‘hedge’ out their risks. It didn’t seem to work for them last year. Nearly all of them lost money.
The Paulson Advantage Plus Fund lost an epic 48%. And despite the name, the Paulson ‘Recovery’ fund wouldn’t have been much use with a loss of 27.7%. The Henderson European fund lost 42.8%. Senvest lost 36.9%.
The list goes on. In fact, out of the 300 hedge funds on HSBC’s score card, just fifteen of the 300 actually gained by more than 10% for the year.
Put another way, just 5% of the world’s hedge funds outperformed gold last year.
Gold put in a gain of 10.1% by the close of the year, despite falling $400 from its September peak of US$1925 / ounce. Aussie gold had a similar result of 10.2%.
You can start to see why the mainstream dislikes gold – when an inert block of metal sitting in a vault outperforms their best ideas.
What can we expect from gold in 2012?
A Good Year For Gold
All the ducks are lined up for another year of good gains.
To kick start gold’s year, the US government has reached the debt ceiling yet again. There hasn’t been much press about it yet, but a few days ago the debt level nuzzled up against the $15.2 trillion mark.
If the US government increases the debt ceiling again, it is a green light to borrow more. It took just 6 months to borrow the last trillion. Like a mortally obese person with the key for the cake cupboard, it’s hard to imagine them discovering self-control any time soon.
As the US debt level rises, the gold price will rise with it.
You can see the two accelerating together in the chart below. News about changes to the debt ceiling is due shortly.
If the limit is pushed up to $16.2 trillion as expected, the gold price should trend towards $1900 if the long-standing relationship holds true.
The mood around gold at the moment is quite negative after a rough finish last year. It fell as low as US$1525 and has now spent nearly a month under the 200 day moving average. This is the red line in the chart below, which has been a clear support line for years.
This fall has got the media calling the end of the bull market-which is frankly ridiculous. Most of them wouldn’t know a gold bar if they found one in their latte. Gold was still up 10% for the year. And there’s been no slowdown in any of the factors fuelling gold’s bull-run. And after forming a double bottom around $1525, the chart looks bullish.
Then consider the timing: in seven years out of this 11-year bull-run, gold has set its lowest price for the year by February the 8th. That’s a pretty amazing pattern. Put another way, 65% of the time gold is at its cheapest during the first five weeks of each year.
I suspect that we have already seen gold’s low point for 2012. The selling during December would have been driven by profit taking at the end of the calendar year. Gold was probably the only thing to rise in many portfolios last year: an easy target to sell to improve end-of-year results. The sell-off left gold looking very cheap and investors are now moving in.
So what are the main drivers of a higher gold price this year?
Firstly, the Chinese can’t get enough of it. They are the biggest producers of gold globally. They are also the biggest importers. The central bank has been buying not to mention the government telling 1.1 billion people to buy it as well. Shipments of gold from Hong Kong into China have gone parabolic in the last few years (see chart below). The Chinese are rapidly trying to diversify their assets away from US dollar denominated holdings, and won’t be stopping any time soon.
In October alone, 85 tonnes of gold were shipped into China. To put this in context, this is about 40% of what the world’s gold mines produced during that month.
The second big reason I’ve been bullish on gold – and am probably more bullish now – is that central banks, as a whole, are big buyers – and they are buying more gold as time goes on.
The central banks are the biggest players in the market this year. What they do drives the direction of the gold price. A very clear trend has formed since 2005. As you’ll see in the next chart, the central banks buy more gold each year… and this year has been massive. The World Gold Council estimates that central bank buying will take the equivalent of 2 months-worth of the entire world’s gold-mine production this year.
The third and final big reason why I’m bullish for gold is because of the global debt crisis and the inevitability that the US Fed will print more money. The greater the money supply, the more it dilutes the value of that currency. So the price of real things, like gold, increases as a result.
They might deny money printing is on the cards for now. But the Fed will have no choice but to crank up the presses. There is $2.7 trillion of short-term debt they need to get someone to refinance in 2012 alone.
Who in their right mind would, or even could, lend that much to the US? We’re in the middle of a banking crisis! And I’m pretty sure the US has had a credit downgrade. Over the next 4 years, this debt will blow out to $5.6 trillion.
But gold isn’t the only precious metal to watch…
I think silver will have a more explosive year than gold.
After a disappointing 2011 where the metal price closed down 10%, many of the short term speculators have now been flushed out of the market.
The silver price is now in bargain territory, and what is happening in the market is very bullish. The silver price recently had its biggest jump in three years, and went on to jump 12% in three days. Tomorrow we’ll explain why something similar could happen again to silver in the next few months.
Dr. Alex Cowie
Editor, Diggers & Drillers
