Forecast: Gold Price in 2014

It was a terrible year for gold bugs as the precious metals has fallen from about $1,700 to trade below $1,200.

Should bulls feel relief as 2013 is coming to an end and look hopefully for the new year or misery will continue to haunt those who buy gold in hopes for a new rally? Let’s look at possibilities.

The first logical question to ask is: why gold is so weak? There are several important factors. First, there are no demand for a safe haven, neither need for a hedge against inflation as world economies try to balance between growth and recession. Second, investors prefer other assets with higher yield, especially stocks. Third, the Federal Reserve has started to reduce its monetary easing and other central banks may follow suit.

How thing will unfold in the next year? It is unlikely that we will see any noteworthy inflation, while stocks will likely continue to perform well as global recovery proceeds. These factors offer no hope for the precious metals. Monetary policy is a different matter. It is true that the Fed showed readiness to scale back quantitative easing. Yet it does not mean that it will be cutting stimulus very often and that the next round of QE tapering will come soon. Janet Yellen, the new Fed Chairwomen, is perceived to be cautions and it is possible that the US central bank will pause with tapering to avoid damage to US recovery that is still rather fragile. And if the Fed will decide to be bold and perform another stimulus reduction, it may hurt growth or even throw the economy back into recession. Such case would be very helpful for gold. By the same token, if the central bank will be willing to reduce monetary accommodation and will be able to do so without any serious damage to growth, than gold is in real trouble. As for central banks of other nations, they are not as bold as the Fed and we will not likely see monetary tightening in any other country (except for New Zealand perhaps).

The supply and demand outlook is moderately favorable for gold. Jewelry demand is expected to increase, while supply is constrained by increasing mining costs and miners have problems maintaining profitability. Saying that, demand for the precious metal may yet drop as India, which is one of the major gold consumers, restricted gold imports.

What forecasters say about specific price levels? Of course, it is hard to predict the exact behavior of the metal in the future, but there is a common trend among analysts’ predictions. No longer experts promise crazy prices like $5,000 or $10,000 and even the $2,000 level looks hardly achievable. Most specialists believe that the precious metal will trade at about $1,200 on average. UBS said after it has lowered gold forecast from $1,325 to $1,200:

The struggle for gold not only rests with the predominant selling interest amongst investors currently, but with limited positive catalysts looking forward; gold is unlikely to regain its former appeal.

UBS warned:

Our expectation for weaker prices by no means suggests a straight path south. The $1200 average forecast reflects the view that the gold market will fluctuate widely as it faces the crosscurrents of an improving macro backdrop, the changing landscape of physical demand and, ultimately, the implications on mine production.

In fact, some economists believe that gold may jump to $1,700 in the middle of the year, just to be thrown back to the current level. The psychologically important $1,000 level should provide major support for the metal.

If you have any questions and comments on gold today, use the form below to reply.

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