Gold prices had gold bugs giddy in the fall of 2011. In September, the luminous yellow metal touched an intraday high of $1,920 a troy ounce, putting the precious metal up roughly 35% for the year.
At the time it seemed like investors, traders and even the guy at the corner store were all buying, hoarding, and lusting for gold.
But the stellar gains were short lived, and by the end of the year gold prices had fallen by nearly 20%.
Part of the striking decline in gold was due to the fact that the "smart" money that had once been amongst gold's biggest cheerleaders, sold it.
Some booked profits, some sold it to reflect gains in portfolios, others were forced to sell to meet margin requirements, and others wanted to start the New Year with a clean slate.
Gold prices in 2012
Enter 2012, and gold prices enjoyed a lustrous January, rising some 10%, helped in particular by Chinese New Year celebrations.
Gold has since languished as investors became more willing to take on added risk, delving more into equities. While gold prices foundered, the Dow rose 8% in the first quarter, the S&P 500 gained 12%, and the Nasdaq enjoyed a nearly 19% gain.
And more recently, not even gold's best friend, Federal Reserve Chairman Ben Bernanke, offered up much help.
Following the commencement of the two-day FOMC meeting last week, gold experienced a volatile day, but managed to end virtually flat from the previous trading session. The Fed left interest rates steady and extinguished hopes for immediate further monetary loosening measures.
Without a promise of more quantitative easing, long gold holders headed for the exits.
Nonetheless, many sophisticated gold traders are poised to pounce on gold with every dip.
Among them is the storied and accomplished commodities investor Jim Rogers.
Best known for calling the commodities rally in 1999, Rogers recently said, "If there is a shock to the system, such as a eurozone country like Spain going bankrupt, then everything will go down, and I hope I am smart or alert enough to buy more gold at that point."
The renowned investor also added that if India, the world's largest bullion buyer, implemented another tax increase on gold imports, it would pave the way for a smart entry point for investors, since it would limit the country's input to the gold market. The Indian government hiked the tax level for gold bars, coins and platinum to 4% in March, up from 2% in January.
Meanwhile, Rogers is mildly bullish about economic conditions in the United States for 2012, noting that because we are in an election year, the government is pulling out all the stops to boost the U.S. economy for at least two years.
So, Rogers is positioning his portfolio by stocking up on commodities, including gold. He explains that if economies do recuperate and prosper, they are going to need more commodities.
Conversely, Rogers says that if growth wanes and a recession looms, he wants to have a stash of commodities because of the flood of money-printing that is bound to follow.
Either way, Rogers likes gold.
That is not to say that gold is bulletproof. In fact, Rogers says a gold price correction could happen sooner rather than later, and the downside is $1,200-$1,300 a troy ounce.
Investors may be wise to watch for and seize upon any sell-offs in gold.
Power of gold
Of course, there are myriad reasons to be enamored by the precious metal.
As the World Gold Council notes:
- Gold is one of the few financial assets that does not rely on an issuer's promise to pay.
- It offers investors insurance against extreme movements in the value of other asset classes.
- It provides a portfolio with diversification, adding protection against fluctuations in the value of one single asset or group of assets.
- It acts as a hedge against inflation because it retains its purchasing power.
- It is held as a hedge against currency fluctuations.
- The demand for gold has shown sustained growth in recent years and the supply/demand ratio has positioned the yellow metal for its most positive outlook in over a quarter century.
And as more and more people become disenchanted with paper currency as a store of value, gold prices promise to rise.
So how high can gold prices climb in 2012?
According to commodities expert Peter Krauth, gold will reach $2,200/oz. in 2012. That's about 35% higher than gold's current level of about $1,635/oz.
"None of the fundamentals supporting gold prices have gone away," Krauth said. "Instead, they've only become even more entrenched."
Longer term, Krauth believes gold prices will eventually hit $5,000/oz in a "superspike."
And that could mean even sweeter returns for gold investors over the long haul.