A number of analysts are predicting big increases in gold prices for the year ahead as the bleak picture of the global economy lends tremendous support for the yellow metal as a safe haven and could even prove to be a catalyst for further upside.
According to recent reports, UBS (NYSE:UBS) said the gold price could hit $2,000 this year based on growth and debt concerns, while Deutsche Bank (NYSE:DB) predicted the price would hit $1,900 by the end of October.
Investors are nervous over slowing demand, and even more so on the debt issues in the eurozone, with continued central bank action pushing gold prices higher as fears of inflation prompt traders to put their money in tangible assets.
Worries are also abound on a slowing US economy, with Moody's Investors Services recently placing the outlook for the US debt grade on negative watch.
Last month's jobs report painted a dismal picture for the labour market, with jobless claims data last Thursday pointing to no real improvement for this month, suggesting a bleak outlook for consumer spending.
In addition, traders were unnerved last week by a weak purchasing managers' index data from China and disappointing export data out of Japan, while the eurozone reported a PMI reading of 46.0, which was up from a month ago, but a decline overall.
UBS raised its three month gold price forecast to $1,850 from $1,600.
“A barely expanding US economy and its implications for the world are now at the forefront of investors’ minds, helping gold push to records,” said Edel Tully, a London based analyst at UBS AG, in a report.
CEO of London-based bullion brokers Sharps Pixley, Ross Norman, said in a note today that with the US balance sheet already at a "staggering" $3.0 trillion, "we should expect this to rise by $0.5 trillion a year until the economy improves and it has been suggested, unemployment falls to 5.5%."
"This is expected to take, at best 5 to 6 years. In short, expect the Fed balance sheet, which has already grown nearly fourfold from pre-crisis levels, to double again."
Norman argues that if gold is to maintain its run rate of a 17% year-on-year increase (compounded), and if prices correlate with the size of the US monetary base, the gold price rally is also only roughly half way there - "arguably it would outperform as confidence in the US dollar evaporates".
In other words, Norman says that gold has the capacity to rise to between $3,500 and $4,000.
The announcement of QE3, some argue, could make matters for the US economy even worse.
"Some have coined QE3 as "QE Infinity" on the basis that the Fed will be purchasing $40 bn/month in MBS for perpetuity - bringing to mind that line from Buzz Lightyear "To infinity and beyond" - others might reflect on the latest policy move and call it "to insanity and beyond"," Norman concludes in his letter to Sharps Pixley subscribers.
Barclays (NYSE:BCS) also revised its gold forecast higher to $1,810 per ounce for the fourth quarter, and to $1,860 an ounce in 2013, on increased liquidity and concerns over currency debasement, inflation and negative real rates.
Prices for gold futures dropped today, however, said to be triggered by a correction in the euro versus the dollar, as a stronger dollar impacted commodities across the board, and profit-taking.
A stronger greenback is negative for dollar-priced commodities like metals as it makes them more expensive to holders of other currencies.
The euro fell Monday as investors were nervous ahead of an action packed week for Spain, which includes a new reform package expected to be released Thursday, along with a 2013 budget that could help pave the way for a bailout request. A potential debt downgrade is also ahead this week.
Gold for December delivery was lately down 0.63 per cent to $1,766.80 an ounce.