Gold has certainly seen its ups and downs so far in 2014, and no one has a crystal ball to look into the future and predict its next direction. However, in an article titled “At the Crossroads: Gold in 2014” from the February/March issue of American Hard Assets magazine, author Mike Getlin points out that “Though 2014 may be the hardest year in recent history for gold forecasting, there are some significant points on which we can achieve some clarity.” Those significant points are the principles of supply and demand, which Getlin believes determine gold’s long-term price trends. Here is what the article had to say about each of them:
Gold’s Supply in 2014
Nowadays, the gold supply comes mainly from two sources: mining and recycling. Today, global mine supply makes up about 65% of the gold that reaches the market, while about 35% of it comes from recycled scrap. As the gold price has risen over the past decade, recycling is more worth the time, effort, and cost it requires. Since 2013 saw gold prices fall, Getlin sees the 2014 recycling supply being subdued compared to previous years. Additionally, gold’s lower prices as of late have lessened the number of exploration projects looking for new sources of gold. The mining industry in general has been hit hard by the decline in the price of gold, and factors like rising interest rates may cause even more suffering.
With these trends in consideration, Getlin’s bet is that “gold supply in 2014 will remain relatively constant, with a trend to the downside over the coming years.”
Gold’s Demand in 2014
Getlin makes the bold statement that “Gold’s price in 2014 will be decided primarily by demand.” Currently there are four general sources of demand: industrial, official sector (central banks), jewelry, and investment. Of those four, Getlin believes the jewelry and investment sectors will drive prices in 2014, emphasizing the importance of India’s love for gold. Investment demand, though unpredictable, global, and complex, is key to gold’s direction in 2014 according to the author. From 2007 to 2011 when jewelry demand fell by 18%, overall gold demand skyrocketed and prices reached $1900/oz. thanks to investment demand. Getlin also claims in the article that the stock market is perhaps the most important factor affecting gold demand as of late, and points out this crucial fact in line with what is currently happening:
“When you look at periods in which gold prices have been subdued, they all have one thing in common: strong investment performance in other sectors.” [emphasis added]
The author believes the stock market’s current gains are “not only outstanding, but unsupportable and probably short-lived,” and compares the situation to when housing prices seemed to be rising indefinitely in 2007-8 but then crashed. He predicts that when the bubble pops, investors will panic and search for a more stable asset like gold.
Getlin makes these conclusions about gold’s direction for the remainder of 2014:
- Lower prices will probably increase jewelry demand, which has the potential to be significantly positive for gold.
- Gold’s already low prices mean we can assume that further downside risk is limited.
- There are many factors to consider when it comes to gold’s upside potential. Any disruptions in the current environment of high stocks, a stronger dollar, and lower inflation could help gold make some meaningful gains.
- As investors move their money out of the stock market and other assets that may be in a bubble, some of it will go into gold.
- Looking at all of the factors discussed, gold is “more likely than other asset classes to provide low downside risk and high upside potential.”
Always keep in mind that past performance is not indicative of future results, and no one has a crystal ball. These are simply the opinions of an analyst using the tools available to him. However, what usually holds true is gold’s intrinsic value and proven function as a store of wealth and hedge against inflation, making it a great asset to add to your retirement portfolio. Call American Bullion at 1-800-326-9598 to speak with a precious metals specialist about rolling over or transferring your retirement account to a Gold IRA holding physical precious metals.