Gold Prices: Where Will They Finish 2012?

Editor's note: As part of our partnership with PBS's Nightly Business Report, TheStreet's Alix Steel joined NBR Monday (watch video and read transcript here) to discuss what 2012 may hold for gold.
NEW YORK (TheStreet) -- Can gold prices regain their luster in 2012?

Gold prices ended 2011 with a fizzle. Gold ended the year up 10%, but had fallen 18% from their intra-day high of $1,923 an ounce, leaving many investors and fund managers weary of the supposed safe haven asset. Gold was undoubtedly a confusing investment to many. It traded with risk assets, then traded in tandem with the euro, oil and stocks and inversely to the U.S. dollar.

Gold bears point to weakening physical demand out of Asia. China and India accounted for 41% of total gold consumed in 2010, according to the World Gold Council, but both countries are struggling to maintain their fast and furious growth.

India consumed only 878 tons of gold in 2011, a 8.4% drop from 2010. The Bombay Bullion Association believes that in the first quarter, India could import half of what it did in 2011. Indian demand has been ravaged by high interest rates and a devalued rupee, making gold more expensive to buy.

Demand in China is strong, but not enough to compensate for lackluster Indian demand, and many fear a slowdown if China's economy also slows drastically. China's inflation has moderated to 4.2% and the central bank has allowed banks to keep less money in their reserves, but seems reluctant to cut rates further.

To make matters worse, mine production was up 5% in the last quarter and there is a worry that central banks might start selling gold to raise dollars.

On the flip side, the bulls point to 11 years of gold price gains and argue that gold's recent massacre was a normal correction. Central bank buying has also been robust, with the official sector buying 344 tons of gold in the first 11 months of 2011. Turkey and Russia comprised the lion's share of buying.

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Finally, bulls take comfort in the fact that inflation is outpacing interest rates, leading to negative real interest rates in most countries. As people's money in the bank is literally worth less, investors flock to a hard asset like gold to preserve their wealth. Many are expecting inflation to pick up speed as central banks around the world gear up to fight deflation with more money printing.

Jeffrey Wright, senior research analyst at Global Hunter Securities, sees gold range bound for the year between $1,450 and $1,750 an ounce. Wright says there could be spikes to $1,900 or $2,000, especially if gridlock in Congress brings up another budget battle and highlights the U.S.' own fiscal problems. "I don't think the bull market is over, but there is near term consolidation that could go on for six months or longer."

Leo Larkin, metals and mining analyst at S&P Capital IQ, thinks that $1,900 gold might not be that much of a stretch. "Gold has been going up without interruption for 10 years" and a correction is totally normal, Larkin says.

"The United States' [money] supply is up 9% from the beginning of the year and the monetary base is up 30%. They are setting the stage for higher [gold] prices," argues Larkin.

"People get so caught up with the next three minutes for gold and they should really be focused on the next three years," says Frank Holmes, CEO of U.S. Global Investors. "Does anyone really believe in the long term strength of the U.S. dollar ... We're just going to have to live with this volatility for another 12 months," says Holmes, who still thinks gold price could double to $3,600 an ounce in 5 years.