Gold Prices Poised for 11th Year of Gains in 2012

NEW YORK (TheStreet) -- Gold prices took a beating in late 2011, but many experts think the path in 2012 is still paved with higher prices.

Gold had a wild 2011, starting the year at $1,412 an ounce, hitting a low right out of the gate of $1,314 and then rallying to an intra-day high of $1,923 an ounce.

The past few months have not been kind for gold. The precious metal tanked 13% in September and 8% in just three days last week as a strong dollar hammered prices. Gold's safe haven status looked to be a thing of the past as negative headlines out of Europe triggered a rush into the dollar instead of gold as liquidity dried up.

But gold's recent massacre is not scaring most experts.

"What I am looking for is a gold price of $1,800 an ounce in 2012," says Jeffrey Wright, senior research analyst at Global Hunter Securities. Wright says there could be spikes to $1,900 or $2,000, especially if gridlock in Congress brings up another budget battle and highlights the U.S.' own fiscal problems. "Once we get back into those discussions, there will be further pressure on the U.S. dollar and a refocusing on gold as a safe haven asset."

Leo Larkin, metals and mining analyst at S&P Capital IQ, thinks that $1,900 gold might not be that much of a stretch. "Gold has been going up without interruption for 10 years" and a correction is totally normal, Larkin says. Gold has risen on average 17% annually over the past 10 years, and while Larkin doesn't expect such a juicy return in 2012, he does expect the up-trend to continue.

"The United States' M2 supply is up 9% from the beginning of the year and the monetary base is up 30%. They are setting the stage for higher [gold] prices," argues Larkin. Before last week's carnage, $2,000 price targets for 2012 were all the rage but even current "conservative" forecasts represent 12% upside from current levels.

"People get so caught up with the next three minutes for gold and they should really be focused on the next three years," says Frank Holmes, CEO of U.S. Global Investors. "Does anyone really believe in the long term strength of the U.S. dollar?"

Since 1975, the dollar has lost 75% of its purchasing power and 98% of its purchasing power compared with gold. "We're just going to have to live with this volatility for another 12 months," says Holmes, who still thinks gold prices could double to $3,600 an ounce in five years.

Not everyone is as optimistic. Jon Nadler, senior analyst at Kitco.com, thinks gold prices will more likely see $1,000 an ounce before $2,000 an ounce. "The question will remain for 2012, to what extent will investment demand be able to remain the principle driver and continue to attract interest from speculators and investors," he said, a shaky prospect after last week's carnage. Nadler thinks gold might need a significant period of consolidation, perhaps two to three years, to regroup.

The combination, however, of gold's selloff mixed with persistently high prices make gold stocks more attractive. On the one hand, gold's selloff makes the stocks even cheaper to buy, as the stocks fall with the underlying commodity. However, companies mining gold for $400-$800 an ounce, are still seeing big profit margins and increased free cash flow.

"Even if you weren't a gold bug, they look like good value investing," says Larkin. Gold stocks used to outperform the gold price, but have lagged of late. In 2011 Market Vectors Gold Miners (GDX), a basket of large cap miners, has sunk more than 12% while the gold price climbed 13%.

The popular gold ETF, SPDR Gold Shares (GLD), has distracted hedge funds but Larkin thinks that will change and institutions will rotate into miners.

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