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Gold Prices in 2013: Where We'll Be in Six Months

Gold investors have enjoyed a bull market for more than 10 years.

In fact, the metal's string of annual gains is its longest winning streak in at least nine decades.

So it is hardly surprising that some investors are questioning whether the strong performance will continue for gold prices in 2013. Recent market activity shows a short-term pullback is on its way.

As Money Morning's Chief Investment Strategist Keith Fitz-Gerald explained today, "Many hedge funds and institutions are using gold to collateralize their marginable assets right now so one of the first things they're going to sell to raise cash when faced with a margin call is gold. They're also sitting on large profits that they'll immediately begin to take off the table in a sell-off. This will end up catching a lot of investors by surprise because they expect gold to take off when the stuff hits the fan."

But that doesn't mean the long-term 2013 gold price outlook is doomed.

Fitz-Gerald said gold will take off - "but only after it takes an initial hit."

In fact, Money Morning Global Resources Specialist Peter Krauth said gold could hit $2,200 by April or May.

Looking beyond the sell-off, here are three key drivers of gold prices in 2013.

India and Gold Prices

Indian demand for gold fell off a bit in 2012, thanks to the Indian central bank blaming gold for India's economic woes and the Indian government raising the import fee on gold. A weak Indian rupee also made gold very expensive for the locals.

But history is a guide here. We've seen this movie about weakening gold demand from India before - in 2009, to be exact.

In early 2009, the Indian economy and rupee tanked, much as happened in 2012. Gold demand dried up.

According to precious metals consultancy Thomson Reuters GFMS, Indian demand for gold in the first quarter of 2009 collapsed by 77%. For the entire year GFMS said Indian consumption of gold dropped by 19%.

This year the Indian economy slowed to its weakest growth rate in nearly a decade. And gold prices hit a record high in rupee terms. A forecast by the World Gold Council said that India would only buy 750 tons of gold this year, down 25% from 2011 levels.

The key for investors is what happened next after the 2009 falloff in demand.

In 2010, as pent-up demand for gold was unleashed, Indian gold consumption soared 74% to a record high of 1,006 tons, according to GFMS. The drop in demand was simply cyclical. A rebound from cyclical lows in India will be one driver behind gold's continued push higher in 2013.


Central Banks Buying Gold

Another support for gold prices in 2013 will be continued central bank buying.

In July, Moody's Analytics said, "One strong positive for gold demand is purchases for the reserves of governments and supranatural organizations. After many years of shedding reserves, net buying by the official sector reached 456 tons last year. The desire to diversify from major currencies may continue to drive such demand."

The diversification away from major currencies is especially true among emerging market central banks that are looking to diversify away from the U.S. dollar.

Take the central bank in South Korea, for instance. The Bank of Korea, holder of the world's seventh largest reser

Posted by Tony Daltorio on 10/25/2012