Will 2013 Be A Golden Year For Gold?
The economic outlook for next year can be characterised by more intense uncertainty – the US fiscal cliff, an Italian election and concern over the direction of the Chinese economy. This points to a possible return of the 'risk on' trade in January, which would be bad for gold, but good for the US dollar.
In fact the short-term technicals for gold are not that positive on the upside. Gaining traction above $1,700 troy oz has proved challenging and a test of support around $1,680 is quite likely and maybe even $1,650.
Uncertainty = more QE
But the flip side to the deep economic uncertainty is that it is likely to spur central banks into more action. Indeed, they appear to be talking up their game with Mark Carney, the next governor of the Bank of England, considering dropping the inflation target – largely ignored anyway – and setting a GDP growth target instead. Ben Bernanke, the head of the US Federal Reserve, is targeting a US unemployment rate of 6.5%, joblessness is currently 7.7%, before considering reversing its very aggressively lose monetary policy. Therefore if there are big falls in US unemployment next year that could be bearish for the yellow metal.
US not completely abandoning inflation target
He also talked of a projected inflation rate up to two years ahead of no more than 2.5% as another factor guiding monetary policy and next year the Fed will be buying $85 billion of bonds a month. Should the fiscal cliff occur – with a rise in US taxes combined with government spending cuts – that would be a deflationary event. Though Bernanke has stated there's little the Fed can do to offset this, it could spur even more aggressive money creation all the same.
ECB could be in action next year
In the Eurozone, Spain is expected to ask for help from the European Central Bank to support its sovereign bonds and Italy might be forced to do the same as it is in election mode. So far the markets have been satisfied with ECB's commitment to do whatever it takes to save the Euro and the announcement of its Outright Monetary Transactions programme in September, which is yet to be called upon. And then there's China. If it's economy slows significantly next year more aggressive monetary stimulus could be considered over there.
Central banks becoming more unorthodox
Next year is unlikely to see an end to quantitative easing, in fact it could be on an even bigger scale, as policy makers grow increasingly impatient for a sustained economic recovery. Also, the world's major central banks are straying into the path of carrying out ever more unorthodox monetary policy experiments, which should see outbreaks of 'risk off' rallies. Medium- to longer-term this should be a positive for gold plus the long-term technicals remain supportive for a bull market.
Yellow metal fatigue?
However, what should worry gold bulls is that all these factors are well known by the market -- and in theory discounted by participants -- as are expectations for the yellow metal to hit the $2,000 mark soon. And markets have a regular habit of dashing widely held expectations. Gold probably will get to $2,000, eventually, but the journey could be tortuous and unpredictable.