Where are gold prices headed now?

Thu, 23 Jan Pre-Open

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Gold has been the asset of choice for conservative investors over the last few years. While equity markets have always been volatile, gold played the role of providing much needed stability to an investor's portfolio. This was certainly true at least up to the end of 2011. In the second half of 2011, the price of gold peaked at a little over US$ 1,900 per ounce. Since then, the precious metal has seen a volatile swing in its price. Today, it trades for about US$ 1,250 an ounce.

So what does 2014 hold in store for gold? If this question was to be asked to Wall Street analysts, their answer would not be very encouraging. The prognosis for this year seems to be rather dull. As per an article in the financial express, a poll of 37 analysts, conducted by Reuters, revealed an average gold price forecast of US$ 1,235 per ounce for 2014 and US$ 1,260 per ounce for 2015.

The analysts seem to be convinced about two things. First after such a sharp fall, of about 28% in 2013, gold is unlikely to stage a sharp recovery. Secondly, gold price would not repeat its sharp fall of 2013 this year. Thus, the price is likely to be flat in 2014 with a possible downward bias. Another thing that has become apparent among the analyst community is their confusion regarding the perception of gold. Should it be a safe haven investment? Should it be seen as a currency? Or is it better to treat it as just another commodity?

This uncertainty is compounded by the fact that as the world economy recovers; more money would flow out of gold and into equity markets. This was seen in 2013 and some analysts foresee a continuation in this trend. Additionally, the surge in physical gold demand from China witnessed last year may not be sustained this year. While demand for gold from China is expected to be strong in 2014, a big jump from the record amounts imported last year is not expected.

So does this mean that the outlook on gold is poor? Certainly not. Gold should always be a part of every portfolio as it is an insurance against the reckless money printing that we see around the world, especially in the developed countries. Selling your gold holdings due to short term price movements would not be a good idea. While short term price fluctuations will occur in all asset classes, in the long run, only the fundamentals will drive asset prices. It is in this aspect that gold comes out on top.