Gold has long been touted as one of the most reliable investments out there, and lately many investors have been buying it as if positive returns on the metal were guaranteed. However, all that could change in 2012 if the Chinese government gets its way. According to GFMS, a global economic consulting firm specializing in precious metals, the Chinese market absorbed around 22 million ounces of gold in 2011, meaning that it took between 30 and 35 percent of all newly-mined gold off the market[1]. While this might mean good things for value in terms of scarcity of the metal, the long-term effects are slightly harder to predict. To further complicate things, a London trader who has a history of accurate-but-difficult-to-confirm predictions recently reported that the Chinese government is attempting to reach contract agreements with multiple gold mining companies to buy all of their gold output on a long-term basis. The report has not been confirmed, but if it is true and the Chinese government succeeds in this effort, it will have a detrimental effect on global gold markets, which are heavily leveraged and have only a small fraction of the amount of gold necessary “to meet the contractual obligations of existing contracts.” Should the availability of newly-mined gold go down, gold markets like COMEX would likely have to close out many short positions and dramatically reduce sales volumes on paper contracts for gold. The result would certainly be higher gold prices, but it could also result in “outright debt default of one or more…national governments,” bank failures, inflation and possibly even seizure or shutdown of major global market operations, warn analysts.

Of course, these are worst-case scenarios, but if you are buying gold – or thinking about doing so – then you do need to be aware of these issues. Some economists have predicted that gold will actually experience a bear market starting in May of this year, largely due to falling prices in the latter part of 2011. However, most agree that a “panic in the market can send gold rallying again” and predict that at worst, the metal might fall to $1,450-$1,485 before catching a bounce[2].

Are you planning to invest in gold in 2012?

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