NEW YORK (TheStreet) -- Can gold prices regain their luster in 2012?

Gold has started 2012 with a bang, with prices up 11% in January alone. Gold's recent rally was ignited primarily by the

Federal Reserve

announcing it would keep interest rates low until late 2014. With the Fed virtually saying it would try to create inflation, gold was off to the races.

Around the globe, inflation is outpacing interest rates, leading to negative real interest rates. As people's money in the bank become literally worth less, investors flock to a hard asset like gold to preserve their wealth. Many are expecting inflation to pick up speed as central banks around the world gear up to fight deflation with more money printing.

Bulls also point to 11 years of gold price gains and argue that gold's late 2011 massacre was a normal correction. Central bank buying has also been robust, with the official sector buying 430 tons of gold in 2011. Turkey and Russia comprised the lion's share of buying.

Gold bears, on the other hand, point to weakening physical demand out of Asia. China and India accounted for 41% of total gold consumed in 2010, according to the World Gold Council, but both countries are struggling to maintain their fast and furious growth.

Vote: Where will gold prices finish in 2012?

India consumed only 878 tons of gold in 2011, a 8.4% drop from 2010. The Bombay Bullion Association believes that in the first quarter, India could import half of what it did in 2011. Indian demand has been ravaged by high interest rates and a devalued rupee, making gold more expensive to buy. High and volatile gold prices might also make it hard for India to ramp up its gold purchases despite its own recent rate cuts.

Demand in China is strong -- the country imported 389 tons of gold in the first 11 months of 2011 -- but not strong enough to compensate for lackluster Indian demand, and many fear a slowdown if China's economy also slows drastically. China's inflation has moderated to 4.1% and the central bank has allowed banks to keep less money in their reserves, but seems reluctant to cut rates further.

To make matters worse, mine production was up 3.8% in 2011, and there is a worry that central banks might start selling gold to raise dollars.

The backdrop for gold in the short term continues to be the tug-of-war between the euro and dollar. Despite the Fed's easy monetary policies, investors seem more worried about the health of the eurozone rather than the health of the U.S. economy. Although any economic panic should be a recipe for higher gold prices, instead gold is trapped between a volatile euro/dollar relationship.

Jeffrey Wright, senior research analyst at Global Hunter Securities, is revising his 2012 gold price forecast from $1,750 on the high end to $1,950 an ounce, due to the Fed's long term interest rates. "There is a possibility of breaching $2,000 per ounce of gold in a momentum spike," says Jeff Wright, managing director and senior research analyst at GHS, "which we believe would be for a limited amount of time due to profit taking, increases in physical supply and futures exchange intervention" such as margin hikes.

"Easy money policies coupled with signs of inflation seeping into the economy will only enhance the gold market," argues Wright. Risks, however, include a stronger dollar due to the European sovereign debt crisis as well as margin hikes on the Comex where the CME would raise the amount of money it would cost to trade a gold contract, thereby shaking speculators out of the market.

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.

"The United States'

money 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.

"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 ... We're just going to have to live with this volatility for another 12 months," says Holmes, who still thinks gold price could double to $3,600 an ounce in 5 years.

Morgan Stanley has a current gold price forecast for 2012 of $2,200 an ounce based on more stimulus from central banks, in particular the Federal Reserve, as well as a normalization of gold lease rates. Gold lease rates had trended into negative territory, a 22 year low, as demand surged to use gold as collateral for U.S. dollar loans. As liquidity needs ease in Europe and as more European banks access the U.S. dollar swap line put in place by central banks, the pressure on gold may ease.

Barclays Capital has revised its price target for gold based on the Fed's recent moves. The firm's first year half average is currently $1,775 an ounce while its second half average could rise to as much as $1,975 an ounce. Barclays says gold could still see spikes to $2,200 as well as corrections reflecting gold's battle between a stronger U.S. dollar and soft physical buying versus strong investment demand and central bank buying.

Bank of America/Merrill Lynch sees gold prices averaging $1,850 an ounce in 2012, with a high of $2,000 driven mainly by more quantitative easing from the Federal Reserve and European Central Bank. The firm expects $600 billion and 500 billion euros worth of new money to be pumped into the system, respectively. "We expect gold prices to rise by 16%, or $275, over the next 12 months.

James Steel, analyst at HSBC Securities, lowered his average gold price target to $1,850 from $2,025 an ounce, but Steel expects a wide trading range where gold could pop to $2,050. "Any shift in focus from the eurozone to the U.S. and its fiscal problems would be likely to benefit bullion," wrote Steel in a note. However, deflation scares and deleveraging will limit gold's rally.

Jon Nadler, senior analyst at, 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," a shaky prospect after last week's carnage. Nadler thinks gold might need a significant period of consolidation, perhaps 2-3 years, to regroup. He also thinks its possible for the Federal Reserve to start raising interest rates earlier than its mid-2013 target.

GFMS, an independent research consultancy owned by Thomson Reuters, thinks that gold prices could peak at the end of 2012 or beginning of 2013. In its 2011 Gold Survey report, GFMS forecasts a volatile year for gold prices with gold sinking as low as $1,600-$1,550 an ounce, averaging out at $1,760, and perhaps spiking to $2,000 an ounce. But then the party is over.

"We think the peak would be towards the end of this year or maybe in the first half of next year," says Neil Meader, research director at Thomson Reuters GFMS. The end to gold's 10-year bull run would come with a renewed faith in currencies as the structural imbalances that have impeded paper money slowly start to fade. "One overt trigger that is worth looking for is the start of a serious ratcheting up in interest rates because for gold investment to be popular you do need very low interest rates," says Meader.

Now that you've seen what the experts have to say, we'd like to hear your thoughts on where you think gold prices will finish in 2012.


Written by Alix Steel in

New York.

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Alix Steel


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