Gold bars in India
Gold bars in India

In 2011, gold continued its outstanding performance as the best investment option in an otherwise highly volatile market. But, the demand in Asia, the recovery of the eurozone from the ongoing debt crisis and any further U.S. stimulus package will impact the future of gold and investment returns in 2012.

Investors gained a return of about 9.3 percent from gold in 2011, less than U.S. 10-year Treasuries (which gave about 17 percent), Brent crude oil (13.5 percent) and German 10-year Bunds (31.1 percent).

However, there are mixed forecasts on the possibility of the yellow metal continuing its bull run in the coming year as its value has moderated towards the end of the year. The precious metal has lost 11 percent of its value so far in December 2011.

A poll of 20 hedge fund managers, economists and traders conducted by Reuters predicts that gold prices will fall below $ 1500 an ounce over the first quarter of next year and are unlikely to retest the all time high of September 2011 until late 2012 at the earliest.

On December 29, gold trotted the "death cross," as it fell below the 200 DMA, the 20-day moving Average (DMA). It is the first time that gold is entering the death cross since 2008, according to Reuters.

However, an anonymous poll of delegates at the London Bullion Market Association (LBMA) annual conference has predicted that gold will rise to $2,019 an ounce by the last quarter of 2012. Though it would be a 12 percent increase from the current levels, the survey did not see any record-breaking rally to happen in the bullion market in 2012.

But some of the contrarian view pointed to the overstretched conditions which led to the volatile situation in the market, and brushed aside the possibility of it leading to a major correction in the bullion market. "The higher level of volatility is a function of increased economic uncertainty…… but it doesn't portend a reversal of the gold market," the Reuters has quoted HSBC analyst James Steel as saying on the sidelines of the conference. He also predicted that gold will be in the territory of $2,025 an ounce for 2012.

"The macroeconomic climate remains positive for gold. The fact that there's a high level of volatility in the market doesn't take away from its safe-haven status. You've got to look at it over time compared to paper assets. If it were treated as a currency, it would have outperformed every other currency in the last 12 months," he added.

John Fallon, president of hedge fund Pia Capital Management, said gold is "in an orbit by itself" among commodities and remains his favorite investment in the sector, due to its high liquidity and the support offered by solid physical demand. "Gold still has our undivided interest," he told Reuters at the LBMA conference.

"We favour both the (gold) ETFs and the actual spot OTC market," he continued.

The sluggish growth outlook across the OECD, eurozone debt crisis, high inflation and strong demand from Asia will drive increased gold investment in 2012, Marcus Grubb, MD of Investment Research at the World Gold Council, told Bloomberg TV.

Here are some of the key factors that will impact gold prices in 2012:

1) Recovery of US economy

Following the trend in the last quarter of 2011, if the U.S. economy recovers fast, attraction to gold will ease. As the economy began recovering, the interest rates can go up; investment will go out from gold to other options. On the other hand, if the U.S. economy goes under a double dip depression, gold prices will strengthen.

2) Recovery of eurozone

Eurozone crisis will continue to impact gold prices as the region is still groping for a solution to its economic crisis.

3) CME Margins

As in 2011, when the bullion prices start strengthening, Chicago Mercantile Exchange (CME) will increase the margins for gold and silver contracts to keep the market under control. This will adversely affect gold prices as the small traders would be under pressure to keep up the margin requirements.

4) Forex fluctuations

The strengthening of the U.S. Dollar against major currencies in the world like Canadian and Australian Dollars, Japanese Yen, euro and Pound will negatively impact gold prices as it will push the price of the yellow metal in the native currencies.

5) Demand from India and China

India and China are the largest markets of gold. If the Indian economy grows faster and consumption improves, it can push the global demand, and thereby prices of the yellow metal. As the disposable income of the people increases, the demand for gold as an investment destination also goes up.

Earlier, the World Gold council had predicted a 10 percent increase in Chinese demand in 2011.