What will move the gold price in 2014? Metal had its worst year since 1981 in 2013 but gold can still shine despite the recovery

Gold is traditionally seen as a safe asset in volatile times but, despite flirting with the $2,000 barrier in 2011, it has since dropped to $1,200 off the back of economic revivals in developed markets.
But according to online gold trading website BullionVault, there are still reasons to hold on to the asset. Adrian Ash of BullionVault outlines the prospects for gold in 2014.
Dropping more than 24 per cent this year against the US dollar, gold suffered its worst year since 1981, when it was down 32 per cent, and little better than 1975, when it dropped 25 per cent.
 

Gold: There are still reasons to hold gold in 2014

But perverse as it sounds, 2013 proved gold's role as financial insurance.
For UK investors, gold priced in sterling has lagged the
returns from the stockmarket (including dividends), gilts, cash savings and UK house prices in 16 of the past 40 years.
It has beaten those assets only eight times.
In those years however, the gains on gold far outweighed its losses under better economic conditions, beating those other assets' average 3.8 per cent return by 46 percentage points.
Overall, gold has delivered 11 per cent annual gains since 1973, second-only to the total return from the Footsie of 15.4 per cent and comfortably beating the pace of inflation as sterling has steadily lost purchasing power.
But with stock markets surging this year, it was only natural that the price of financial insurance would fall.
 

The shining: Gold has underperformed in recent years

The Chinese influence

2013 also proved that China's surging gold demand does not, as yet, set gold prices worldwide.
Western money managers still hold the whip hand, and it was their about-turn in sentiment which sparked the crash in gold prices this spring.
This change in sentiment had various roots. Boredom with six years of financial crisis. The sharp rise in equities. Growing expectation that the US central bank, the Federal Reserve, would start to reduce its QE money printing.
Trend-following money managers ran for the exits from gold, shown clearly by the sharp fall in gold exchange traded fund holdings.
From the record-high holdings of December last year these giant trust-fund vehicles shed one-third of their gold in 2013. That turned what had been around 250 tonnes of annual demand since the gold ETFs were launched a decade ago into 800tonnes of supply. Turning over some 4,500tonnes per year, the gold market buckled.


Yes, Chinese households and investors proved eager buyers, snapping up all that gold and more besides. Like a growing number of private investors in the West, they took the price crash to be an opportunity, adding to their gold holdings as a long-term investment.
But their demand leapt as a result of the price drop, and it was the positioning of speculative traders in US gold futures and options which weighed heaviest of all. From a strongly bullish stance, hedge funds and other leveraged players as a group raised their betting against gold prices to the highest level since 1999, the very low of gold's two-decade bear market.
2013's deafening chorus of bearish forecasts from bank analysts also matches that historic turning point. All a bloody-minded contrarian would need now is for a Western government to start selling gold. But Gordon Brown is long gone. The idea of selling Cyprus' small gold reserves was merely discussed, not actioned in spring.
Western central banks continue to hold gold close, and emerging-market governments continue to buy. When asked, they all name gold's insurance function as the main reason.

Indian trade

Looking to 2014, events in India could be important. Formerly the number one consumer nation, it is now locked out of the global gold market by import restrictions aimed at cutting India's trade deficit, in the hope of supporting the Rupee without stronger interest rates.
Any relaxation of the government's rules could support prices if Western selling continues. But metal is still flowing into the market regardless, but without any duty being paid and with criminals enjoying a 10 per cent margin over legal suppliers.

Is gold a load of bull?

The strategic question for gold bulls, and longer-term allocations, is whether the drop of 2013 will prove to have been 1981, when gold sank from then record-highs to begin a 20-year drop. Or was it more like 1975, when central banks talked tough in inflation but then failed to follow through with strong-enough interest rates?
That reloaded gold's long bull market on the 1970s, clearing hot money out of the trend and then sending prices eight times higher as resurgent inflation saw stock markets and the returns to cash savers collapse in real terms.
Here sentiment among Western money managers and hedge funds will again prove decisive.
Possible tapering by the US Fed may already be priced into gold. The mere idea of less quantiative easing helped spark the spring 2013 crash. But the fact of less money printing, if ever it comes, won't change the zero interest rates or record peace-time debts being worn by savers and investors across the West.