We are now rapidly approaching the year-end.  Here in the UK the commercial TV channels are already full of Christmas advertising, while the U.S. is about to shutdown for the Thanksgiving holiday and is preparing for the annual shopping spree that peaks on Black Friday and Cyber Monday.  Somewhat ridiculously, the UK too – or rather the retail marketing sector – has embraced  Black Friday as well, despite there being no holiday here, as a means to try and stimulate pre-Christmas retail demand.

And Gold, unless there is some cataclysmic event to put a rocket up its tail, looks set to end the year in negative territory yet again in the key US dollar in which it is mostly quoted.  Currently it is around 10% down since the beginning of the year against the US dollar, but this pretty well mirrors the rise in the US dollar index over the year to date, so the fall has not been nearly so great in many other global currencies – indeed the price is actually still higher in a number of them since January 1st.

But even so, the gold price has disappointed precious metals investors in 2015, and according to a Wall Street Journal survey of major investment bank analysts is likely to continue to disappoint in 2016 as well, although they are perhaps looking for what may prove to be a pretty flat price over the full year.

The analysts polled by the WSJ see gold prices hovering at around $US1,000 an ounce through most of next year, anticipating an average price over the period of $1,114 an ounce (a 3.6% fall over this year’s likely average price seen at $1,156) – admittedly this is still higher than the current price which perhaps could be considered modestly encouraging by some, but still a big disappointment to the true gold bugs (who will undoubtedly ignore the findings anyway such is their belief in the yellow metal).  As the WSJ points out, gold has lost over 40 per cent since it peaked in September 2011 so a lot of the less committed gold investors have already exited.

The bank analysts put the likely continuing decline down to the commencement of Fed interest rate rises (widely anticipated to begin next month) and the continuing lack of price inflation against which gold is seen as an important hedge.  But this also almost certainly pre-supposes continuing dollar strength and rising stock markets and whether the Fed would be happy to see the dollar index move above 100 (it is currently at around 99.7) given a strong dollar’s negative impact on US exports is rather less certain.

Now bank analysts are frequently wrong in their long term forecasting, tending to go with the flow, so perhaps not too much significance should be given to these kinds of predictions.  So what is an alternative scenario which might start to see gold pull out of its 4 year decline from its peak in September 2011?

The low gold price does appear to be stimulating physical gold consumption, particularly in Asia.  China looks to be seeing record gold demand this year while Indian demand is picking up again too now that the market has come to recognise that perhaps the gold import duties are there to stay, at least for the time being, and purchases are no longer being held back in the hope of a short term import duty reduction making the metal less costly.  Gold is such an inbuilt part of Indian culture that we are likely only to see demand continuing to rise again failing a big price increase which might put a damper on buying.

Other positive factors are that Central Banks appear to be continuing to buy gold – perhaps at the rate of 400-500 tonnes a year; the longer gold prices stay low the greater is the likelihood of falls beginning to appear in mine production – a fall which would accelerate as any period of price weakness continues; lower prices reduce scrap supplies; liquidations from the big gold ETFs will gradually diminish as the weaker holders move out of the market.  The weak gold prices have also put a virtual halt on most new mine developments and expansion programmes, and a huge reduction in exploration, all of which will see reduced new supply for years to come.

But the sobering part for gold investors is that although Fundamentals may indeed look positive and there may well be a deficit in supply vs demand this year, next year and going forward, it has been apparent that as far as precious metals are concerned a fundamental supply deficit does not necessarily lead to higher prices – one only has to look at platinum and palladium to see this.  Offloading out of ETFs has tended to meet immediate physical demand, and even though this may well be slowing down, prices are still currently primarily set by the COMEX and London markets where huge volumes of paper gold are traded without physical metal supply coming into the equation at all.  Whether this will change as the new planned Shanghai Gold Fix is implemented and the very physical Chinese market plays an ever larger role, still remains to be seen.  This will inevitably have an impact, but this may take time to filter through in terms of global price setting.

Overall next year the movement of the gold price, in US dollar terms at least, will probably depend on the continuing strength, or otherwise, of the US dollar on world markets and although rising interest rates in the US, set against low interest rates and continuing easing elsewhere, should see the dollar continue to rise and therefore gold to fall.  But, and it’s a big but, one doubts that the Fed really wants to see the dollar rising because of the adverse effects this will have on the domestic economy and the correspondin big balance of payments deficit adding to the US’s horrendous debt situation, and it may well take surreptitious steps to keep the dollar under control.

And then there are the so called ‘black swan’ unpredictable events.  The global economy remains in a very fragile state and it may only take a national debt default to raise another Lehman moment.  Geopolitical factors also remain precarious to say the least and there are plenty of potential flashpoints around the world with fuses already lit and running down, which could hugely unsettle global markets and benefit gold – which historically people have turned to in time of crisis.

Even under the investment bank analysts’ scenarios 2016 may not be a bad year for gold at all and even if their predictions are accurate the downside looks extremely limited – indeed on deeper analysis they are looking for a small increase on where gold is at now despite the seemingly negative tone of the WSJ article.  And, as pointed out above there are plenty of potential apple cart upsetters out there which could yet have a positive impact on precious metals prices.  Don’t write gold off yet.