The following is a guest post by Malcolm Gissen, co-manager of The Encompass Fund.  As someone who has been buying gold and other commodities since 2002, I can say with some authority that it is difficult to predict the price of any commodity.  However, one thing I’m fairly certain about is that after 12 consecutive years of increasing value, gold will continue to go higher in 2012. Here’s why:  1. The world’s central banks are buying. For the last two years, central banks around the world—notably those in Asia and Latin America¾have become net buyers of gold. That trend is likely to continue as the banks seek to diversify away from U.S. and European currencies and increase their allocation to gold as a percentage of their total reserves.  2. Europe’s investors are nervous. Nervous European investors are concerned about the survival of the European Union and of their banks. As a result, the World Gold Council reports that in the third quarter of 2011, Europe set a quarterly record, investing E4.6 billion in gold. This trend is likely to continue.  3. ETFs, ETFs, ETFs. During this time of unceasing financial crises, ETFs have made it easier for investors to shield themselves with investments in gold. The gold Exchange Traded Funds saw an inflow of 77.6 tons in the third quarter of 2011, a 58% increase from the same period in 2010. With gold ETF’s expanding to other parts of the world, the demand for gold as an investment should only increase.  4. The Chinese love gold jewelry, too! In a society that values gold, the growing Chinese middle class helped fuel a 13% increase in the demand for gold in Q311 compared to Q310. Retail jewelry chains are expanding to smaller cities to meet this growing demand. As the incomes of Chinese citizens are likely to continue to rise, the number of Chinese reaching middle class status will also increase, creating a significant market for gold.  5. The easy gold has already been found. Gold supplies have been constrained for some time. It’s more difficult to find large gold deposits and increasingly challenging to bring remaining stores out of the ground. The process of obtaining mining permits is difficult and time-consuming. Skilled geologists are both hard to find and expensive. The costs of building a mine and getting into production have soared to the point where capital expenditures of $3-$5 billion are not unheard of. In addition, it can take up to 10 years from the initial discovery of gold to get a gold mine into production.  Global demand for gold in the third quarter of 2011 (the most recent available numbers from the World Gold Council) increased 6% from one year earlier to $57.7 billion (up from $45 billion), an all-time quarterly record.  At a time when demand is clearly outstripping supply, when confidence in our governments and financial institutions is at an all-time low, when wars and acts of terror have become a daily occurrence, when most of the world’s largest economies are either slowing down, near recession or barely accelerating, why would investors sell gold? It does not make much sense to me.
George Soros sold off much of his gold holdings in 2011 and other big investors followed suit, but they may have left money on the table.