Gold, silver and mining stocks declined yesterday after HSBC cut its 2012 average gold price forecast from $1,850 to $1,760 on a "sharp decline" in Indian demand and reduced expectations for QE. One of our subscribers asked us to comment on the above and we thought that you might also be interested in our views.

At the first sight, the above looks bearish. In fact, it looks like if someone said "gold will not rise to $1,850, but to $1,760" or "gold will decline $90". Since the sentiment among precious metals investors is negative right now, even experienced investors and traders might get the feeling that the above is a very bad sign for the metals market. Let's examine the above statement and see if it's really something that you should be concerned with.

At this point (until the end of April 2012) gold's average price for 2012 is close to $1,680. Since there are 8 months left until the end of the year, by expecting gold to average $1,760 for the whole (!) year, HSBC is actually expecting to see gold on average at $1,800 for the rest of the year. The key word is "average". If gold rallies and then corrects, then the average price will be significantly below the top level, also because the consolidation usually takes more time and thus is more "important" when calculating the average price.

For instance, if gold stays for a week (5 trading days) in the $1,900 range but then consolidates close to $1,750 for two months, the average price for the whole period (assuming that there are 21 trading days in a month) will be $1,900 * 5/(5+21*2) + $1,750 * 21*2/(5+21*2) = $1,765.

Consequently, the average 2012 gold price at $1,760 or average of $1,800 for the rest of the year is not really a bearish projection - it's a bullish one. For instance we could easily see these kinds of averages with the following scenario: a rally right now that takes gold to previous highs (slightly above $1,900) then a consolidation in the $1,750 - $1,800 range with another major upswing starting close to the end of the year.

We already commented on the QE issue, so we won't go into it once again here (in short, we think there will eventually be another round of QE and the bad news associated with its delay is already "in the price" so it will not cause it to move lower). The impact of the supposed sharp decline in Indian demand (due to India's decision to double gold import duty to 4 percent) will not likely be important enough to derail the gold bull market. While we agree that this is not a favorable fundamental change, it is important to keep in mind that increased demand from China and other countries will likely more than make up for the negative impact of increase in the gold import duty in India. Moreover, its effect will be smaller than many analysts expect simply because of the black market transactions.

There is one more thing that we would like to share with you today. Below you will find something that we received from a reliable source in the jewelry business.

"The amount of scrap gold being turned in to scrap gold dealers and smelters has slowed down significantly and could be down as much as %40.  This information is from our own buys and the buys of our buyer who has had the same reports from other significant scrap buyers in the Country.  This drop in supply should show up in the near future in references to gold pricing."

Naturally, the above-mentioned decline in supply is a bullish factor for gold.

Summing up, the bullish picture is intact in both: short- and long term.

As always, we'll keep you updated should our views on the market change - even if it means sending another message in several minutes.

Thank you.