But some of the global buyers that lifted gold futures past $1,400 an ounce could head for the exits if rising rates make bond yields more attractive. That's one of the pitfalls facing gold next year. "All the factors that have driven gold higher--the uncertainties, commodities as an asset class, gold as the ultimate currency--I don't see that changing significantly," said Bill O'Neill, a principal at Logic Advisors in New Jersey.
The second half of the year is harder to predict, with one potential setback coming in the form of surging interest rates in Europe and the U.S., he said. Much higher interest rates would push investors away from gold, which bears no interest, pays no dividends and thus carries an opportunity cost.
The market could absorb higher interest rates over time, "but no surging interest rates," he added. O'Neill sees gold hovering around $1,500 an ounce next year.
Gold has gained around 26% this year, putting it on track for its third double-digit gain of the last four years. To chart gold's price movements since 2000 is to draw an imaginary mountain slope offering few toeholds in its steep ascent.
Global Appetite
This year, fears of a sovereign credit crunch in Europe; lack of confidence in the dollar, the euro and other major currencies; and low real interest rates pushed Western investors toward gold in droves. In Asia, there was fear of runaway inflation, particularly in China; more money around as emerging Asian economies grew and more of their residents joined the ranks of the middle class; and the presence of investors traditionally more predisposed to own gold--Indians and Chinese are among the top consumers of gold in the world.
Western investors in 2010 bid more than ever for gold coins, bought futures contracts, and poured record amounts of money into exchange-traded funds backed by gold. Gold futures soared to a settlement record of $1,416.10 an ounce on Dec. 6.
Indians, Chinese, and others in Asia kept buying physical gold, in addition to investing in it, despite the ever-increasing prices.
Jewelry demand in the four corners of the globe held despite the higher prices. In addition, the influx of scrap gold, normally a cooling factor whenever gold prices spike higher, was largely absent this year, analysts said.
Fund Flurry
The demand from some of these buyers also makes gold vulnerable to a swift correction. Large hedge funds, which helped push gold to the forefront of investing this year, could sell their gold positions as easily as they bought it, swiftly taking the floor from under prices.
"It would be a big impact for sure, but for the time being, I don't think they will," said Dan Smith, an analyst with Standard Chartered in London. "It's still a very bullish story."
Large funds deeply invested in gold-backed ETFs include Soros Fund Management LLC, headed by legendary investor George Soros, which increased its positions in SPDR Gold Trust (GLD, 2840.HK), the world's largest ETF backed by gold, in the third quarter of the year.
Paulson & Co. is another large hedge-fund firm invested in SPDR Gold Trust. The firm maintained its investment for the third quarter, owning 31.5 million shares of the ETF as of Sept. 30.
Calling A Top
Several forecasts predict gold has $100 to $400 more to gain. The timing of the peak may depend on interest rates. Gold is likely to average around $1,400 an ounce in 2011, which suggests a rise to around $1,550 is yet to come, Smith said.
Analysts at Goldman Sachs say gold prices are likely to continue their upward trajectory next year, but likely peak in 2012 on rising interest rates. "As we look toward 2012, we find it timely to reiterate our view that at current price levels gold remains a compelling trade, but not a long-term investment," they said.
As the second round of quantitative easing is set to end in June 2011, and as Goldman has forecast "strong U.S. economic growth" over the next two years, U.S. real interest rates are seen as starting to rise in 2011, "likely causing gold prices to peak near $1,750 (an ounce) in 2012," they said.
Bank of America Merrill Lynch forecasts gold topping $1,500 in the near term, with "gold supply likely remaining contained" and helped by demand from investors and central banks.
In The Grip Of The Greenback
The second half of the year is likely to be more challenging than the first, says Tom Pawlicki, an energy and precious metals analyst with MF Global in Chicago. If the economy recovers fully, some of the bullish arguments for gold will disappear. The dollar is a wild card in that scenario: Spending cuts would push the dollar higher, making all commodities less attractive, he said.
For stretches of 2010, the traditional inverse correlation with the dollar held for gold as well as most commodities. A stronger dollar is a negative for commodities, which are priced in dollars, because they make them more expensive to holders of other currencies, dimming their investment appeal.
For bullion, a weaker dollar also triggers fears of heightened inflation and thus provides a boost for gold, often seen as the ultimate protector of wealth.
The dollar went through rough patches in 2010, but its valleys were tempered by the euro's own woes. The single currency was at times viewed as on the brink of a collapse as concerns about sovereign debt in peripheral euro zone countries plagued markets.
The Dollar Index, which compares the U.S. unit against a basket of six currencies, has risen 3% this year, and the euro slid more than 7% against the U.S. dollar.
Euro zone concerns dominated the gold trade in the first half of the year. For the astounding second half, however, dollar weakness was the central story.
The metal reached more than a dozen record highs in the second half of the year, with the metal getting fresh life after Federal Reserve Chairman Ben Bernanke in late August floated the idea of expanding the Fed's bond-buying efforts, a second round of so-called quantitative easing detailed in early November. For the most part, only modest retracement punctuated the winning streaks as fears of dollar debasement following the asset-purchasing move kept buyers in, more interested in "buying on the dips" than leaving the market.
Many of this year's themes are likely to spill into the first half of next year, which would be good news for gold holders. "A slow economy, low opportunity costs, negative real yields, wealth preservation, and central bank buying should all offer support," MF Global's Pawlicki said. For the latest updates PRESS CTR + D or visit Stock Market news Today
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