Myra P. Saefong: “Gold’s 13-year bull run breaks with 29% annual loss” – Market Watch

Posted on :Dec 20, 2013

By: Myra P. Saefong

Market Watch

December 20, 2013

Commentary: Gold prices fell 29% this year and 2014 may be another year of loss.

The year  2013  put the brakes on a 13-year run in gold prices, and its prospects for recovery next year don’t look great.

The metal is preparing to mark its first yearly price fall since 2000 as analysts warn of the risk for further declines in the year to come. As of Thursday’s close, gold futures prices have lost 29% year to date. That would be the largest annual loss for gold futures since at least 1984, according to FactSet data tracking the most active contracts.

It’s a tough reversal for investors who hung onto the precious metal in hopes the forces that increased gold prices by seven times by its peak in 2011 from late 2000 — the popularity of gold-backed exchange-traded funds, rising global wealth and worries about inflation — would stoke demand for the natural resource for decades to come.

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“Gold has lost its luster as an investment vehicle in 2013,” said Jeffrey Wright, managing director at H.C. Wainwright, and the “long bull run of 13 years has been broken.”

Gold traders and investors spent much of the year fretting over the question of if and when the Federal Reserve would begin to taper its $85 billion-a-month asset-purchase program and they clung onto comments from Fed officials and mulled economic data for hints on the answer.

“The ghost of tapering has been there from March 2013,” said Chintan Karnani, chief market analyst at Insignia Consultants.

On Wednesday, it came to life. The Fed announced it will reduce the pace of its asset purchases to $75 billion from $85 billion a month starting in January — and if the economy improves at the pace the Fed expects, Chairman Ben Bernanke said he could foresee the bond-purchase program coming to an end by late next year.

Gold’s initial reaction wasn’t quite what you’d expect. Volatile was the best way to describe it.  After the taper announcement late Wednesday, prices for gold fell in electronic trading from its settlement price on Comex, recouped that decline to trade higher, only to fall back even more. By Thursday’s close, prices lost over 3% to finish at a more than three-year low under $1,200 an ounce.

Less money-printing “theoretically leads to less dilution of the U.S. dollar, which theoretically leads to less inflation, which logically would be bad for gold,” which is seen as a hedge against inflation, Adam Koos, president of Libertas Wealth Management Group, explained.

“Unfortunately for gold bulls, there is no bottom in sight from a technical viewpoint, so what looked like a bottom-forming range has now broken out to the downside,” said Koos. “Gold buyers should wait till early-to-mid January and take a look at the picture then before they consider opening position at this point.”

An ‘extraordinary’ 2013

This year certainly started out with promise — and expectations for $2,000 gold prices — but ended with forecasts for declines to $1,000 in the new year.

It was an “extraordinary year for gold,” said Julian Phillips, founder of and contributor to GoldForecaster.com.

“It started well with demand from Asia rising nicely, but then the prospects of stronger economic growth in the U.S. caused U.S. institutional gold investors to see the potential for greater profits in equities,” he said.  Losses for gold futures this year compare with a year-to-date gain in the S&P 500  of 27%.

This year 2013 was also a year that gold reacted “negatively to positive news,” said Insignia’s Karnani. “Gold should have risen in 2013 on tapering uncertainty,” but instead they fell, he said.

Gold prices also continued to fall during the U.S. government shutdown in October, which should have resulted in higher gold prices, he said. “If gold prices cannot rise on a [price] positive set of news flows, investors ought to be concerned over gold investment and they will be churning their portfolio for better returns.”

And churn they did. Gold ETFs and the like saw a steady stream of sales taking place this year, said GoldForecaster.‘Somewhat bearish’ 2014

After a tough price fall this past year, gold investors and traders alike will be waiting for a much-needed lift in 2014.

The gold market will “likely continue to watch the path of the [Fed] monetary policy, but also economic growth in India and China for signs of demand growth,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management.

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He expects real interest rates to increase in 2014, pressuring gold prices, but he also sees economic growth in emerging-market economies stabilizing, which could lead to better demand growth, if India removes curbs on gold imports.

Overall, he’s generally “somewhat bearish” on gold prices in the new year due to better global economic growth, though he expects the price decline to be more modest and volatile this coming year than 2013’s.

J.P. Morgan cut its 2014 gold-price forecast last week by 10% to $1,263 an ounce, citing Fed tapering and low U.S. inflation.         That followed other analyst forecast reductions and downbeat views on the metal.

Yves Lamoureux, president of Lamoureux & Co., a market advisory firm based on behavioral economics, said he expects gold to bounce to $1,500 by the second quarter of 2014 “in tandem with lower interest rates,” but then fall significantly by the end of the year.

Lamoureux’s concerned about the possibility that the Fed has “mismanaged so badly their balance sheet” that the central bank may have to add to its stimulus measures by the summer of next year because of an economic slowdown. In turn, that would “blow the balance sheet to unmanageable proportions,” he said.

Tracking gold’s same behavior from this year, which saw prices drop even as stimulus measures were in place and interest rates climbed, the metal’s prices may fall against a backdrop of more stimulus and as rates climb even higher, he said. So he’s keeping his $1,000 gold-price target for year-end 2014.

And assuming prices don’t fall below $1,000 in the next week and a half, that suggests a second consecutive year of losses is in store for gold, though it probably won’t be as bad as this one’s.

com’s Phillips. All the while, benchmark U.S. equity indexes hit record levels.

 

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