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Will gold extend its gains for 12th straight year?

According to Goldman Sachs, the safest investment bet among commodities in 2012 is ... gold.

The US financial institution says prices of the precious metal, which provided the best returns of all commodities in the past five years when adjusted for volatility, are expected to continue sizzling this year, according to a Bloomberg report.

Gold prices could even hit a new high this year, Goldman Sachs predicted. Gold prices hit a record high of $1,920 an ounce in September last year, before falling back to $1,550 levels.

Of course, if you don't believe Goldman Sachs (understandable after the company's hugely controversial role in the collapse of the sub-prime mortgage market in the US), a Reuters poll also predicts that gold's record-breaking rally is set to extend into this year and the next.

 Will gold extend its gains for 12th straight year?

The yellow metal is likely to continue its rally for the 12th year.

Poll respondents predicted an average spot price of $1,765 an ounce in 2012, 14 percent higher than last year's average of $1,544 per ounce. That, in itself, is 26 percent higher than 2010's $1,228 an ounce, the news agency pointed out..

So, even after 11 straight years of gains, it seems the shiny metal is in no mood to retreat.

Gold bugs say there are two reasons why it's smart to go for gold: loose monetary policies around the world and increasing purchases by central banks.

Loose monetary policies keep interest rates low and liquidity easy, which reduce the cost of holding bullion. In fact, gold prices surged $13 an ounce to $1,731 an ounce after US Federal Reserve Chairman Ben Bernanke promised on Tuesday to keep interest rates low until late 2014 earlier this week. Bernanke also hinted at further monetary easing. Together, they should keep the value of the dollar subdued - and boost gold's appeal as a preserver of wealth.

Central banks have also been buying gold in 2011, underpinning support to prices. According to Reuters, central banks bought more gold last year than any other time since 1964, as they added 157 tonnes to their holdings in the six months to November.

Of course, these reasons do not make gold prices a one-way bet. A sluggish US economy and its high fiscal debt, rising uncertainty in the Middle East, a seemingly never-ending European sovereign debt crisis, and extreme weather events are expected to keep markets (including gold) volatile through the year.

The wild cards, as always, remain Indian and Chinese demand (which account for roughly 40-50 percent of physical gold demand), unexpected dollar strength and stabilisation in Europe.

At the moment, there's a buying frenzy for gold in China, brought on by the start of a new Lunar Year: in the build-up to the festivities, imports in November 2011 (latest available data) jumped six-fold from a year ago, said a report in The Wall Street Journal.

"Gold is traditionally bought as a gift during the Chinese New Year, and 2012 looks set to be a strong year for demand," said Albert Cheng, managing director, Far East, of the World Gold Council, in a statement recently. "We see this as part of a longer-term trend."

China overtook India as the world's top consumer for gold jewellery purchases last year, even as investment demand continues to climb. "In an environment where investment options are limited and bank accounts yield negative real interest rates, Chinese savers are increasingly turning to gold as an investment," a Financial Times report noted.

Meanwhile, in India, jewellery demand shrank last year as a mix of high local prices, unfavourable currency effects from a falling rupee and high inflation kept buyers away.

However, demand for gold as an investment, in the form or coins or bars, continues to rise, although investment demand is just half of that of jewellery demand.

Overall, it's safe to say that as long as there is financial turbulence in 2012 (and it seems extremely likely there will be plenty of it), there will be buyers for a 'safe haven' like gold, no matter how unproductive it might seem to some experts.

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Updated Date: Dec 20, 2014 08:16:58 IST