Gold had a rough 2013. With a loss of 28% on the year, the spot price of gold was down by nearly the same percentage that the S&P 500 was up. And I don't expect gold to regain its shimmer in 2014.
Let's take a look at the macro environment as we enter the new year:
- The inflation that gold enthusiasts have feared since the onset of the 2008 crisis is dead on arrival. The latest CPI figures show an inflation rate of just 1.2%, and energy prices are actually falling.
- The quantitative easing that fueled the inflation fears of the past few years is already being tapered, from $85 billion in bond purchases per month to $75 billion per month... with more tapering to come.
- The federal budget deficit, though still far too high, continues to fall and is expected to be just 3.3% of GDP in fiscal year 2014.
- Gold miners are contemplating hedging their risk by selling their production forward, which will effectively cap the price of gold (and sends a very negative signal to the market).
- Hedge funds and other large institutional buyers - the driving force behind much of the rise in the spot price of gold in the past decade - appear to be abandoning gold if the outflows from gold ETFs are any indication. Gold ETF holdings are now at their lowest levels since 2008.
- Gold now has competition in the anti-establishment crowd from Bitcoin and other "virtual" currencies. (I think Bitcoin is a joke, mind you, but that doesn't mean that it won't continue to steal gold's thunder for a while longer.)
And on top of all of this, we should remember that gold had a monster secular bull market run that lasted 12 years. When the last bull market in gold broke, in 1980, it took two decades for it to finally find a bottom.
I try not to spend much time on specific price targets, as I see these as being something of a distraction but I expect the spot price of gold to finish in the range of $1,000 to $1,100.
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