Economic Forecast 2012

As I stated in my previous article Will There be a QE 3?, weak market data coupled with negative market sentiment is being reflected in the stock market. 2011 was a dismal year for most stock investors. The chart below depicts the 2011 rate-of-returns for different asset classes.

Furthermore, our governments may decide to create another round of stimulus during the first half of 2012, to counter-act these negative forces in the market. Some foresight, however, tells us that the negative market should be embraced as assets prices retract back to their equilibrium from the excess liquidity.

A second reason for the prediction of another quantitative easing package is due to the American 2012 presidential elections this November. As a policy to create optimism and regain some consumer confidence in the markets, money printing will be created. This policy essentially pushes the can down the road again, and creates an even bigger problem when it comes due. If this event does occur, interest rates will remain low, and as a result, most assets prices will continue to inflate (i.e. stocks, real-estate and commodities) due to money being cheap. On the other hand, currencies (paper money) will re-trace their long-term downwards trajectory towards the bottom. In this situation, the presidents who follow this model are looked upon as favourable candidates as they help move asset prices up (at the expense of a weaker dollar); the majority of people will take this as favourable as they cannot see the direct impact to their savings in the bank.

So how is this translated in the markets?

1.     Gold will continue to be an attractive investment. I forecast gold to re-test its 2011 high of $1895/oz and consolidate. There should be an upward move to $2000/oz,  at which point it will be faced with a major psychological barrier. Despite this barrier, I expect gold to be hovering above $2000/oz by the end of 2012.

2.     Silver will also be an attractive investment, as I expect silver to be one of the best preforming assets of 2012. Silver should outperform gold in 2012. Silver will most likely re-test its high of $48/oz and consolidate. I expect silver to be hovering above $50/oz by the end of year 2012.

3.     Oil will do marginally well this year, however, nothing like in 2011. I expect a final oil price to be at approximately $110 per barrel.

4.     Dow Jones. I forecast this index to make a comeback in 2012. However, in terms of gold it will still lose. I expect the DJ/gold ratio to continue to decline and possible reach 7:1,  so it  may reach 14,000 by the end of the year.

5.     Other Commodities should also do well in 2012, expect for natural gas.

6.     Currencies will continue their downward trend. However, commodity-rich countries such as Australia, Canada, and Brazil should be fine.

7.     Bonds  will probably be net losers after inflation.

8.     Real estate(rental properties)  Should also do marginally ok as an asset (in general) However, I expect real estate to perform better in commodity rich areas.

At the end of my economic forecast 2012, the only asset that I personally do not want to be in is cash or bonds. 2012 will not be a year of “cash is king.” Refer to my previous article about fiat currencies for more information about paper money.  As inflation wipes out personal savings, people that are in the know should safeguard their investments in tangible assets that are inflationary-hedged, as this will most likely preserve their wealth.

One should always remember that there are no guarantees, and that the above predictions are made assuming the realization of some kind of stimulus package. Were the reverse to happen, we would most likely see the  risk-off trade (bonds, cash, etc.) gain momentum.