In case you missed it, 2012 is finishing as a dud year for gold. And according to RBS Morgans economist and analyst Michael Knox, 2013 is going to be worse as we enter the “World at the End of Fear”.

After this week’s dip, gold in Australian dollars is up just 2.17 per cent since January 1 – below the inflation rate. Over 52 weeks, gold is actually down 3.13 per cent. Even in US dollars it’s been poor – ahead only 0.67 per cent.

But that’s just taking a cheap (yet irresistible) shot at the gold bugs as such random calendar points as 12 months don’t mean much. Pick another set of dates and you can engineer another outcome. Much more important for all investors is the big forecast sent out to clients by Knox last Friday, before gold took at tumble to a four-month low and iron ore prices continued to firm.

Despite various on-going headlines, Knox argues that we’re entering the end of fear, that financial markets in 2013 will see their lowest volatility since 2006.

In brief, after two international banking crises in five years, we’re getting over the fear that there’s another one around the corner. With central banks pumping out liquidity, keeping interest rates down, lower volatility and less fear will mean investors will have less demand for “precautionary assets”, those  that are held out of fear, “just in case”: gold and US treasuries.

Knox says that on the RBS Morgans models, gold and US treasury bonds in 2012 were the most overvalued that they have been for more than 30 years. With a decline in fear, those assets will tend to be sold by investors to buy assets that will make a living for them in the long term – equities and industrial metals. Says Knox:

“The last five years have seen two international banking crises. What is remarkable about this is that prior to 2007, the world had not seen an international banking crisis for 70 years. The problem is that after two international banking crises in five years, we begin to think that the world is normally like this, looking over our shoulders and waiting for the next bank to crash. The truth is the world is not normally like this. Prior to the 1930’s, we had to go right back to the period before the Federal Reserve was born to find the previous banking crisis.”

Knox clearly thinks, as the markets are betting, that the US fiscal cliff won’t result in another banking crisis. With the enormous liquidity being provided by central banks, financial market volatility should return to something more normal in 2013.

“This lower volatility world will mean that as investors become used to living in a world of less risk, they will have less demand for precautionary assets… Investors bought them because they were scared. When investors live in the world of the end of fear, they will tend to sell these precautionary assets and instead buy assets which will allow investors to make a living in the long term.

“Our models tell us that these assets will include equities. They also tell us that instead of holding precious metals, investors will be better off holding base metals. These might be metals like copper and aluminium and nickel. These are all important industrial materials in a world which is behaving normally. This means the world is not behaving as if we are surrounded by banks which are about to crash.”

Parts of the world still have a way to run to emerge from fear – Knox doesn’t expect Europe to get there until 2014 – and the recovery of economic growth is by no means immediate, but the impact on asset classes doesn’t wait for that.

“The European banking panic of 2011 and 2012 generated a selloff in world commodity prices. The banks put their money in their socks. They did not want to lend it to people financing international trade. The result was a sharp fall in commodity prices beginning in 2011 and reaching its low in 2012. This whole process was merely repeating what had happened when the US banking crisis of 2008 generated an earlier selloff in commodities in 2009. After 2009, commodities rallied again.

“Just so, the commodities selloff seemed to reach its low in 2012 with the end of the European banking panic and commodities began to rally again in late 2012. The first commodity to obviously rebound was Brent oil. This appeared to reach its low in about May 2012. By the second half of 2012, Brent oil was again strong and getting stronger. We think that US domestic oil or West Texas Intermediate grade will follow the recovery path earlier set by Brent.

“The second half of 2012 has seen bottoming action in commodities such as copper, aluminium and nickel. Our models of these commodities suggest that these should turn into major rallies in 2013. Selling precious metals and buying base metals will be the great trade of 2013.”

Models are never guaranteed, but it is an interesting call that is not without logic. As for the impact on domestic equities:

“Australia saw a slowdown in earnings for the ASX200 in 2012. This reduces our model estimate of the ASX200 to 4750 points. Even at this level, there is still almost 200 points of upside in the closing days of 2012. Current estimates of earnings of 2012-13 suggest that the value of the ASX200 will rise to 5200 points in 2013 as these higher earnings are reported. This tells us that the Australian equities market should move up further as the US market recovers in 2013.

“Much of the decline in Australian earnings in 2012 was caused by a decline in commodity prices caused by the European banking panic. We have noted that this European banking panic is now a thing of the past. This means that commodity prices will recover in 2013. This in turn suggests that the recovery in Australian earnings will be at least as good if not better than currently believed.”

With Australians’ superannuation funds sitting on record amounts of cash and the yield on cash falling, it’s further grist for the equities mill. But there’s always an alternative view of a world still in fear, a view that you can generally rely on the nearly-always-bearish Gerard Minack to supply.

In a note to Morgan Stanley clients today, Minack seems to argue that 2013 won’t be good because 2012 was:

“One reason to expect lower returns in 2013 than in 2012 is that asset prices now are significantly higher than a year ago. The problem is most obvious in debt markets: Current low yields point to low nominal returns. Equities have also seen a big re-rating that likely will mute future returns. It may be that flows out of debt could push equity valuations higher. This is not our base case, but if 2013 equity returns match those in 2012, it will almost certainly be due to valuation expansion.”

Minack is writing primarily about the US market, but the point he makes at further length about debt markets, especially sovereign debt markets, fits with Michael Knox’s story on precautionary assets. And bear Minack does make a concession about his 2012 forecast, while turning into ammunition for his gloomy 2013 outlook:

“Absolute returns in 2012 will be better than we expected a year ago. These returns were driven by significant valuation expansion in most major asset classes. The result, however, is that current above-average valuations point to below-average returns ahead.”

Knox instead concentrates on a lift in US corporate earnings:

“By the end of 2012, the earnings of companies in the US S&P500 had first recovered to and then exceeded the previous historic peak of 2007. This growth in earnings had occurred for two reasons. The first was the enormous expansion in the earnings of energy companies associated with the US shale gas revolution. This is so remarkable that the US may again become energy self-sufficient. The second was the enormous expansion of earnings of technology companies. The US national accounts data showed that 2010 and 2011 saw the largest increase in investment in equipment and software that the US had seen since the tech boom period of the 1990s. Most of us have seen this in terms of the enormous growth in profits and sales seen by Apple Corporation.

“The combination of these earnings bring estimated earnings per share for the fourth quarter of 2012 to an estimated $US25.77. This brings 12 month rolling operating earnings per share for the fourth quarter of 2012 to $US99.81. Our model of the S&P500 tells us that at this level of earnings, the S&P500 is worth some 1650 points. This means that there is still more than 200 points of upside in the S&P500 in the closing days of 2012.”

Devoted bulls and bears will continue to believe what they choose to believe, but the argument has become considerably more encouraging – as long as you’re not a hard-core gold bug.

Michael Pascoe is a BusinessDay contributing editor who happily admits to being wrong about gold in seven of the past 30 years, albeit expensively so in the seven of the last eight.