VANCOUVER — Barring some kind of global economic disaster this month, 2013 will end with the gold price down markedly. It will be the first year-over-year decline for the yellow metal since 1997 — and many expect the trend to continue in 2014.
Gold prices have slumped more than 25% so far in 2013, from US$1,675 per oz. at the start of the year to US$1,245 per oz. at press time.
In late November, UBS — one of the largest gold-market traders — cut its gold forecasts across the board. The bank slashed its one-month target to US$1,180 an oz. from US$1,450, and lowered its three-month outlook to US$1,100 an oz. from US$1,375.
The outlook from Goldman Sachs is similar. Goldman analysts are predicting a 15% drop in 2014 gold prices, resulting in an average price of just $1,050 per oz.
For context, in the last five years gold ascended from below US$1,000 per oz. to best US$1,800 per oz. several times.
So why has one of the most remarkable commodity rallies in history lost its steam? It turns out there are five drivers behind gold’s slide, and many expect them to persist in 2014.
The first is the expectation that the U.S. Federal Reserve will cut back on quantitative easing. This threat has overshadowed the gold market all year, but minutes from the last Fed meeting outline a timeline for the taper, suggesting it will start in the first half of 2014. A pullback of this free liquidity is bad for gold because the metal is the go-to hedge against inflation, which is expected when the government is pumping billions of dollars into debt markets. In addition, a reduction in quantitative easing should help the dollar appreciate against other currencies. Since the gold price in U.S. dollars and the greenback are inversely correlated, a rising dollar is bad for gold.
Second: interest rates are set to rise. The low interest rates of recent years have in some ways been a boon for gold, but interest rates and U.S. treasury yields are expected to rise over 2014. That will push investors away from gold and towards these higher-return options.
The third downside for gold is the slow but steady global economic recovery. For several years after the financial crisis, as the U.S. banking system teetered and several European Union states took turns flirting with insolvency. Investors lost faith in fiat currencies and turned to gold as a safe haven. That appeal is now dimming, as economic and jobs data from the U.S. and Europe show gradual improvement. Less geopolitical tension in the Middle East and the recent nuclear deal with Iran have also stabilized the global financial system, to gold’s detriment.
The fourth problem for gold is that physical demand is ebbing. Demand in China is rising slowly, but demand from top global-consumer India is sinking, because India’s economy is struggling to maintain momentum, and the government recently increased gold-import duties. Gold demand related to market derivatives is also ebbing. After gold’s sharp loss in the second quarter, Western investors began dumping gold exchange-traded funds (ETFs), forcing those funds to liquidate some of their holdings. Analyst Matthew Turner with Macquarie estimates that outflows from gold-backed ETFs have put almost 800 tonnes of metal back into the market this year.
While gold slides, analysts expect a rally in global equities. This means that investors will be more likely to gamble on stocks than on gold, especially following gold’s first year-over-year loss.
Not Good News !!