Gold prices: Could they hit $2,500 in 2012?

Gold prices have fallen in recent months and many analysts expect the correction to continue. But one analyst sees gold prices rallying next year.

Gold prices will rally again in 2012 to reach $2,000 to $2,500 per ounce because demand is still strong and the precious metal is still seen as a safe haven, according to Sabine Schels, a commodities strategist at Bank of America Merrill Lynch.

Despite the correction in gold prices in recent months, Schels said sustained investor demand would result in gold prices averaging $1,850 in 2012, up from $1,573 in 2011.

 “We see no let up in investor interest. Exchange traded funds’ levels continue to hold up,” she said.

 Schels said the negative outlook for sovereign debt, coupled with easy monetary conditions in the euro zone, the US  and Japan, meant gold would retain its "safe haven" status, while still offering comparatively strong returns.

 Gold will also benefit from a continued need for central banks in emerging markets to diversify their holdings, she said.

 Schel’s view differs from some other market participants, who say the sell-off in the precious metal will continue.

 Earlier last week, commodities trader and economist Dennis Gartman told CNBC he expected the precious metal to fall to $1,500 per ounce or lower, and has sold off his personal gold holdings. Meanwhile, trader Steve Cortes predicted an even steeper fall-off to $1,000.

 Crude Oil

 Schels was also upbeat about crude oil, predicting that the benchmark West Texas Intermediate (WTI) will average $101 per barrel in 2012, up from $95.12 this year.

Despite concerns about demand growth due to the anemic global economic picture, Schels said a combination of low oil inventories and further monetary policy loosening will probably support oil prices in the second half of 2012.

“We see very limited OPEC spare capacity. That will allow Saudi Arabia and the other big producers to take some barrels off the markets, as in 2008 and 2009,” she said.

“The break-even price is at around $80 per barrel. That will act as a capital incentive to manage production levels,” she added.

To diversify, Schels recommended soybeans, which she said have “uncorrelated upside”. She said the asset class will benefit from a continued, and steep, drawdown in inventories, which will reverse the fall-off in price seen since September this year.