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Gold Prices: Where Will They Finish 2011?

(Gold poll updated with 2011 price targets from U.S. Gold.)

NEW YORK (TheStreet ) -- The answer to the question "where will gold prices go in 2011" is one of the most sought after predictions on Wall Street.

Gold prices rose 400% in the past decade and made a record breaking run in 2010, rising 26% and hitting an intraday high of $1,637.50 an ounce.

There are many factors that move the gold price. In 2010, one of the most popular reasons was investors buying gold as a hedge against financial disaster in Europe as European Union nations like Greece and Ireland teetered on the brink of default. The response by most governments, one of the biggest offenders being the U.S., was to print money. As paper currencies declined in value, the price of gold rose.

But 2011 has been dicey for gold, with prices getting smacked with double-digit selloffs and rallies. The common culprit has been labeled "rebalancing," where traders who bought gold at the end of the year to show they owned it dumped it in 2011 to book a profit. The same traders jumped back into gold from February through April as violence exploded throughout the Middle East and North Africa region and Japan contended with its worst disaster since World War II.

Technical traders then dumped gold and ran in the first week of May when gold prices tanked 3.35%, only to pick up steam again as the U.S. flirted with default. An 11th-hour deal by Washington avoided complete Armageddon, but the threat of a downgrade and slowing global growth still remain. The gold price is getting no rest from volatility.


The SPDR Gold Shares (GLD) now holds 1,263 tons of gold, close to where the GLD ended its record run in 2010 of 1,280 tons. There are still many analysts warning of a deep correction. Jon Nadler, senior analyst at Kitco.com, had been calling for a 20%-40% selloff in all assets in the case of a default. Jeff Clark, Casey's senior precious metals analyst, predicted that gold could see a 5% correction if Washington avoids a default, which would bring prices down to $1,550 an ounce.

The biggest longterm headwind for gold prices is rising interest rates. Although the Federal Reserve will most likely not raise interest rates until 2012, if the U.S. sees a spike in yields -- due to a credit rating downgrade -- then interest rates could rise, a defacto rate hike of sorts.

The European Central Bank and China have been fairly aggressive with tightening monetary policy in 2011 and more rate hikes are expected. If real interest rates turn positive -- the interest rate minus the inflation rate -- the main reason for holding gold, because it holds more value than paper currencies, could disappear.

But for now investors and research analysts alike think the tide won't turn against gold anytime soon.

Deutsche Bank says gold is on track to challenge $1,653.50 an ounce, a resistance area, while JPMorgan Chase raised its gold price forecast for the fourth quarter to $1,800 an ounce. JPMorgan, which now accepts gold as collateral, cites seasonality, that is strong physical buying from India in the fall, and rising debt levels as the two catalysts for record gold.

"Some people may argue that $1,600 an ounce is the top of the bubble," wrote analyst John Bridges in the report. "But we suggest that unless governments control their debt levels, investors' fear of paper currencies will drive gold higher." The current debt ceiling plan does nothing to cut the deficit but just cuts spending enough to justify paying its current bills.

The same sentiment was echoed by Dundee Capital Markets, which wrote that a weaker dollar and lack of trust in paper currencies would "generate sustained demand for bullion." Dundee has raised its 2011 god price forecast to $1,526 an ounce but more significantly its 2012 price target to $1,750 from $1,573 an ounce

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