London, 20 December 2011

Sharps Pixley: There has always been a natural desire to understand the future insofar as it makes us better prepared to face its challenges and, let's be honest, we can profit by it. In recent years economic forecasting has been amplified from something that is simply useful - to something upon which, some commentators would suggest, our very survival depends. A view on 'the economy' is now de rigueur both in the boardroom as well as the dinner party scene. With concerns about the economy reaching epic proportions, the stakes are now very much raised as we approach year end.

In short, gold forecasting has historically been too right for us to ignore - and wrong too often for us to rely upon it.

There is a valid argument that we may to some extent be wasting our time insofar as events are more unreadable than ever before with economic direction driven largely by political decisions (which are largely unknowable) which, by extension can have unforeseen consequences on commodities such as gold. As such there is a compounding effect which makes the margin for error simply too great. With that disclaimer in mind let's explore what we expect will be the key drivers for precious metals in 2012:

1) US Dollar strength - the US has seen reasonable growth in Q3 and is likely to report better figures for Q4 2011. That said, much of that growth has been artificially created by fiscal stimulants. This has been supportive of the US dollar index which bounced off rock solid support levels. Although growth is forecast to falter as the fiscal stimulus wears off, the US is nevertheless expected to fare better than many regions, especially Europe. This is likely to be a drag on gold prices.

2) Europe - with the ECB failing to come to the table to support the Euro and with the Germans holding the line against European QE, the region is likely to slip further into the mire. Many suggest that a break-up of the Eurozone is now an issue with a high probability mathematically - irrespective of what the policy-makers do. Despite the posturing by Sarkozy and the determination of Merkel - there will remain a policy vacuum at the heart of Europe. Physical gold demand in Europe has been particularly strong and we would expect that trend to increase.

3) Fundamentals - unfashionable though it is to speak of gold's very positive supply/demand fundamentals, we expect these to remain very gold friendly and to underpin current prices.

4) Central Banks - There has been a tidal shift from being net sellers of gold throughout the 90's and 00's to net buyers in 2011 - we expect this trend to continue with Asian central banks continuing to acquire significant amounts of gold - especially China who remain well below par. Concerns about the Euro will remain supportive for increases in central bank buying.

5) Technicals - gold enters 2012 technically weak. Retracements are not uncommon but gold is clearly struggling to re-assert itself above the 200 DMA.

Gold has seen 16% year on year gains in the early 2000's before a 28% gain in 2009 and 2010. This year is likely to see a reversion to the pre-crisis gains of about 16%. For 2012 we would expect to see good gains in gold prices but more modest than those achieved over the last three years.

Ends --