The Price Of Gold In 2014

by: Amod Saul

Gold has fallen nearly 30% last year, putting an end to 12 straight years of growth and setting a record for the biggest annual drop in 30 years. The drop reflects the expectations of many that economic recovery would bring an end to quantitative easing.

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Given the fact that the S&P 500 realized gains of 25% last year and counting opportunity cost, a passive investor parking funds in the SPDR Gold Trust (NYSEARCA:GLD) during 2013 would have lost 55% of potential returns if the funds were passively parked in the SPDR S&P 500 Trust (NYSEARCA:SPY) instead.

As we tiptoe into 2014, while looking in the rear view mirror, it is imperative to get a feel of gold price trends for this year in order to be able to make some relatively sober investment portfolio allocation decisions.

The Fed printed over a trillion dollars during 2013. Most of this money went into high finance and fueled a spectacular rise in stock valuations. Interestingly enough, none of the liquidity trickled to the precious metal.

Many economists and analysts believe that the Fed is unlikely to print the same amount of liquidity during 2014. The majority seems to believe that after flooding the world with billions of dollars through unorthodox bond-buying programs to boost the U.S. economy, the Fed will start scaling back, or "taper," those efforts.

The jitters over the impact of that unprecedented unwinding is scaring investors from assets perceived as high risk. Historically gold was seen as a safe haven.

However, I do not believe that anyone who loses 55% of an investment in an asset within the span of a year, counting the opportunity cost, would still continue to consider that asset a safe haven.

Falling back on probability theory, I can safely assume that gold has a 50% chance to end 2014 in positive territory. That means it also has a 50% chance to end the year in negative territory, which is not really of much help to those of us who need to make an investment or a portfolio allocation decision.

In a previous article titled "Gold: How Low Can It Go?" I gave detailed accounts of gold demand statistics. When I was asked by one of the many distinguished commenters about the right price I would personally feel comfortable buying gold at, my answer was simple: Below $1,000.

I still believe this would be a comfortable price for me to start buying gold and my reasons have nothing to do with supply or demand dynamics or absolute values. My reasons are rather existential.

If I believe that the economy is doing well, which I do, then I would tend to put more weight on the possibility of a Fed taper, which would cause interest rates to rise, the dollar to strengthen and the price of non-interest bearing assets like gold to fall.

If I believe that the economy is doing bad, which I don't, then I would tend to put more weight on a deflationary dynamic, which would also cause the price of non-performing assets like gold to fall.

So, either side of the equation points to a lower price for gold in 2014. I feel comfortable about my prediction due to the fact that $1 trillion in manufactured liquidity did not cause the metal to trend higher last year.

I also feel hopeful that the gold price might dip below $1,000 during the year so I might be able to buy some of the metal to stash away for a rainy day.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.