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(Kitco News) - Gold prices may struggle in early 2012 but eventually will go on to fresh all-time highs by year-end, according to a report by Thomson Reuters GFMS.

However, even though analysts say gold may eclipse the record high hit last year, they also cautioned that the market then could be nearing the closing stages of a decade-long bull run.

Thomson Reuters GFMS listed its gold outlook with the release of the Gold Survey 2011 – Update 2 on Tuesday.   

The report concluded that after rising again in 2011, prices may struggle in the short term, with a cautious forecast of a first-half price average of $1,640 an ounce but a full-year forecast of $1,760.

The metal fell back during the fourth quarter after topping $1,900 in the third. The final London gold fixing of 2011, on the morning of Dec. 30, was $1,574.50 an ounce.

At times during the fourth quarter, there were significant liquidity constraints in the markets and the U.S. dollar strengthened, said Philip Newman, research director for precious metals at Thomson Reuters GFMS. “That led to a bit of softness in gold, which didn’t respond to the continuing euro debt crisis,” he said. “That disappointment therefore became to an extent self-fulfilling as some investors liquidated their positions.”

Some of this persists as 2012 begins, Newman said, citing the still-low net long position of speculators on the Comex division of the New York Mercantile Exchange, as reflected by the most-recent weekly positioning report from the Commodity Futures Trading Commission. Further, buying linked to the Chinese New Year will soon be past, the consultancy said.

The consultancy said, however, it believes that prices should shrug off any lethargy and power ahead to fresh all-time highs. “We could even see prices just over the $2,000 mark later this year or in early 2013,” said Philip Klapwijk, global head of metals analytics at Thomson Reuters GFMS.

Overall, a number of conditions remain in place that could encourage investors to return to the gold market, Newman said.

“We have no signs so far of a resolution to the sovereign-debt (crisis) or policies in place that would suggest that may come to fruition,” Newman said. “Combine that with the likelihood of a further round of quantitative easing in the U.S., uncertainty later in the year with the U.S. elections and the fact that we still have negative real interest rates in a number of economies, that suggests the building bricks are in place for gold investment to come back into the market and help push prices higher in the back end of this year or early next year.”

The report also cited a general mistrust of fiat currencies.

“We’ve seen a great deal of attention on the eurozone debt crisis, which has led some to seek out the dollar and U.S. Treasuries as a least-bad option,” Klapwijk said. “However, the re-emergence of U.S. concerns, in particular any apparent need to adopt QE3, could really fire up the gold market. After all, don’t forget that gold’s price spike last August/September followed on from the U.S. debt ceiling impasse and downgrade.”

Still, Thomson Reuters GFMS sees potential for an eventual reversal in the multi-year rally. Specifically, the consultancy said in a news release on the gold survey: “the report does acknowledge that the gold market is nearing the closing stages of its decade-long bull run and that, once the macroeconomic backdrop changes and investment in gold fades (probably sometime next year), a secular retreat in the price will unfurl.”

As the calendar flips into 2013, some economic recovery should start to occur, although not substantial, Newman said. Still, as inflation becomes more of a threat, interest rates could start to edge higher, meaning an increased “opportunity cost” of holding gold.

The consultancy is not calling for a complete resolution of debt issues in Europe and the U.S., but suggested some policies could be enacted to at least reduce some of the uncertainty, Newman said. If so, this could mean a “more benign” outlook for gold, Newman added.

Bar Purchases, Resilient Jewelry Demand, Central Banks Support Gold In 2011

The report’s analysis of the past year included a number of findings to explain gold’s strength.

World investment, defined as the sum of all categories of investment, rose in approximate value terms by over 20% to a record $80 billion, Thomson Reuters GFMS said. Much of the growth was in physical form; net bar purchases rose by over a third to almost 1,200 tons, with gains particularly strong in East Asia and Western markets. Buying of small bars by retail investors was especially strong in India and China, where inflation and price expectations buoyed the market, Newman said. “We also saw a good total coming out of Europe as well, particularly the German-speaking markets,” he added.

Not all investment sectors were buoyant, however, the consultancy said. For instance, while exchange-traded fund holdings continued to grow, their 7% rise was slower than the 20% jump in 2010, while the investor net long position on the Comex division of the New York Mercantile Exchange fell by more than 90,000 contracts over the year. These changes help explain why world investment in tonnage terms fell by 7%, Thomson Reuters GFMS said. This was listed at 634 metric tons for the first half of 2011 and 929 in the second.

Meanwhile, jewelry demand was described as resilient despite higher gold prices. This declined only modestly by 1.9% to 1,979 metric tons, Newman reported. The resiliency was largely ascribed to strong performances in India and China as a result of bullish price expectations and robust gross-domestic-product growth. Most other countries, in contrast, recorded losses.

At the same time, global scrap supply fell by 2% despite the price rise, the consultancy said. This was in turn attributed chiefly to price acclimatization, near market stock depletion and expectations of higher prices. This meant that jewelry fabrication, net of scrap, actually rose by 2%.

Net purchases by the official sector, estimated to have jumped to 430 metric tons, were also supportive for gold prices in 2011, the report said. This was largely due to trivial sales by signatories to the Central Bank Gold Agreement combined with a marked rise in purchases by countries outside this group, chiefly due to a desire to diversify reserves away from fiat currencies, analysts said. This was also significant as it encouraged private-sector investment, the report said.

These factors enabled the gold market to absorb record mine production, Thomson Reuters GFMS said. Global mine output climbed 3.8% to 2,812 metric tons as new projects continued to come on stream or ramp up, while mature operations were better positioned to sustain output thanks to a high price environment, Thomson Reuters GFMS said. There was a return to net producer hedging, although volumes were slight.

By Allen Sykora of Kitco News; asykora@kitco.com

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