Crushed ore facility
Crushed ore facility Centamin Egypt Ltd.

The consensus among investment bankers and many traders is that gold prices will continue to climb in 2012.

In other words, gold prices are not in a bubble. Among the most sanguine about gold prices is Goldman Sachs. It forecasts a price at the end of next year around $1,940, slightly higher than the metal's 2011 high of $1,925.10, reached on Sept. 6 of this year.

Deutsche Bank also has a positive view on gold. It has told clients the world is halfway through a commodity super-cycle and that gold will draw key support from negative real interest rates.

Our strongest conviction trade remains long precious metals and specifically gold, Deutsche Bank wrote in its The Market's in 2012 publication. In an environment where real interest rates are negative and the U.S. equity risk premium is high we expect this will sustain strong private and public sector demand for gold.

Barclay's is also upbeat about gold, anticipating a rebound in physical investment demand in 2012.

Our strongest conviction trade remains long precious metals and specifically gold, Barclays recently wrote to clients.

In an environment where real interest rates are negative and the U.S. equity risk premium is high we expect this will sustain strong private and public sector demand for gold. Indeed given investor appetite to protect against tail events such as the break-up of the Eurozone, we view an overshooting in the gold price as a high probability event. According to the measures we employ, gold would need to move above $2,170 per ounce for prices to be considered extreme and for the market to start displaying bubble characteristics.

The CME Group, which owns the Comex, offered an upbeat outlook for gold earlier this month.

CME noted in a Dec. 20 article posted on the group's Web site that gold had 16 percent year-on-year gains in the early 2000s before a 28 percent gain in 2009 and 2010. CME expects this year to see a reversion to the pre-crisis gains of about 16 percent.

For 2012 we would expect to see good gains in gold prices but more modest than those achieved over the last three years, CME said in the article, entitled The Economy in 2012 - and its implications for gold.

Key factors

CIBC's Barry Cooper, Managing Director of Institutional Equity Research, sees gold at $2,000 next year and $2,200 in 2013.

With the recent sovereign credit issues in both the U.S. and Europe, and weak economic data from both sides of the Atlantic, we believe the safe haven characteristics of gold will again play an important role in the performance of the metal, he wrote recently.

Cooper cited six factors that bode well for gold in 2012.

1. Supply from mines continues to be limited - While production increases have been touted by many producers, collectively global gold production growth is dismal. Either many of the projects fail to meet production expectations or fail to be built, either on time or at all.

2. Investment demand remains high -- Gold exchange-traded funds account for almost 10 percent of world demand and on the margin have influenced the gold price by likely more than $300 per ounce. Private stocks of gold bullion have also escalated as witnessed by the increased activity within physical coin demand that was up 30 percent year over year. We believe that preservation of wealth has become paramount amongst investors, and on an international stage, gold will be the chosen vehicle for maintaining one's relative position in the world.

3. Central banks are switching from selling to buying - After being net sellers of gold for most of the past 20 years, central banks have become net buyers, and in the most recent quarter bought a net 150 metric tons of gold. The move into gold by central banks was in part driven off of the credit worthiness of foreign debt that is becoming ever more difficult to assess that potential for default.

4. Interest rates remain low, lessening the enticement for hedging -- Gold hedging by producers effectively over-supplies the market today with gold that will not be produced until sometime in the future. By using the contango offered between interest rates and the lease rate for gold, a higher realized gold price could be achieved. Although lease rates remain low, interest rates do not offer any sizeable contango opportunities. In addition, the disdain held by investors for hedged companies continues to put pressure against hedging.

5. Economic conditions are likely to remain clouded for an extended period of time - Thus far financial bailouts have only deferred problems, not fixed them. We believe the agony of a slow recovery will prevail for an extended period of time with multiple stops and starts, leading to an uncertain outlook. Gold is usually considered a stabilizing entity during the periods where there are a multitude of outcomes with a negative bias.

6. Continuing strong jewelry demand from China and other parts of the Eastern world - While jewelry demand has diminished in tonnage terms as well as percentage terms of world gold demand, it remains an important component in the fundamental aspects for gold pricing. Jewelry demand makes up about 50 percent of the global market. Thus despite being on decline in tonnage terms, the dollar amount of jewelry bought reached a record high in the most recent quarter.

The dollar could challenge the upbeat consensus about gold in 2012, according to Deutsche Bank.

We are maintaining our bullish outlook for gold, Deutsche Bank wrote in a Dec. 9 client note. However, we expect the next test for the market will be a further appreciation in the U.S. dollar heading into the new year. Unlike previous periods of risk aversion that occurred in 2009 and 2010, this time U.S. dollar strength is not being accompanied by strong inflows into physically backed gold exchange-traded funds. In fact over the past three years there has been a significant moderation in investor flows into gold, which may reflect some concern that gold has moved into overvalued territory. From a positioning perspective, the liquidation in gold length on Comex over the past few months appears to have drawn to a close but currency trends may yet trigger an additional round of speculative liquidation.

Gold mining shares to see higher demand

CIBC's Cooper said that shares of almost every gold and silver producer have underperformed the commodity for much of the past three years.

We view the situation as a 'risk-off' scenario whereby investors are seeking safety in the metal but not in the equities. We believe that the pendulum between the two investment classes has swung too far and expect that equities should be able to perform better going forward as bottom-line results begin to drive fundamental valuation metrics, he wrote.

Among the themes that we expect will produce an appetite for equities are the following for companies with market capitalizations greater than $3 billion:

1. Growth - Production growth has been the key driver for gold shares for much of the past decade and we think this aspect will continue to be a focus for investors. Among the names offering the strongest production growth in the coming three years are Goldcorp, Yamana, Eldorado, AuRico and Osisko.

2. Dividends - The partnership between investors and companies has become strained with the common mend being increased dividends. Three companies stand out with a unique dividend policy that is predictable and defined, Newmont Mining, Silver Wheaton and Eldorado Gold. Newmont Mining has a dividend policy payout related to the gold price with an escalator that accelerates payments above a gold price of $1,700 per ounce. Silver Wheaton has a payout of 20 percent of the previous quarter's cash flow. Eldorado has a dividend policy related to gold production levels and changes to the gold price.

3. Value - Gold equities have never been cheaper and now many trade well below S&P averages for traditional metrics such as price-earnings ratios. Among the least expensive producers are Barrick Gold, Iamgold, Kinross Gold and AuRico Gold.

4. Safety - One of the reasons for wanting exposure to gold is for the safety aspect offered by the metal. It, therefore, is logical that gold companies which offer safety within their group may be preferred investments. Among the gold producers with the highest safety factors (geopolitical, operational, corporate) are Barrick Gold, Goldcorp, Franco-Nevada, Royal Gold and Silver Wheaton.

5. Discovery - Real value enhancement comes from the discovery of new gold reserves in the ground. We find that while most companies are fairly good at replacing reserves on a consistent basis, few are able to increase their reserves faster than the extraction rate. Among the companies that have had a record of discovery that is better than the rate of mining are Agnico-Eagle, Iamgold, Centerra and Yamana.

The white metals

Unlike the upbeat consensus for gold prices in 2012, there is more diversity on prospects for silver and the other white metals.

Earlier this month Deutsche Bank told clients that silver is likely to continue to underperform gold.

We expect this to continue as silver and platinum group metals remain vulnerable to a deteriorating outlook for global growth, Deutsche Bank said. Given what remains resilient but still fragile business confidence in the U.S. we expect silver will find it increasingly difficult to out-perform.

CIBC, on the other hand, sees silver at $50 next year and $52 in 2013. As 2011 ended, silver was trading several dollars beneath $30 per troy ounce and lower than the price it began 2011 with.

Platinum and palladium may fare better than silver, analysts say.

The main reason for (platinum and palladium doing better than silver) is the deteriorating output picture in South Africa, Barclays wrote in a note to clients. Hampered by strikes, declining ore grades and power shortages we expect the country's output of both palladium and platinum to fall in 2012.

Moreover, after recent accidents, local producers report they are now losing up to four days of production per month because of safety issues. With Russian stocks of palladium now widely believed to be close to exhaustion, palladium supplies look very tight and we forecast a year-on-year decline of 3 per cent to 4 percent in supply next year.

The decline in platinum supply should slow, with Russian supply stable and a relatively modest decline all that we expect in South African supply.

It could be, however, that all of the white precious metals could face troubles in 2012.

Deutsche Bank warned clients recently that silver and platinum group metals remain vulnerable to a deteriorating outlook for global growth.