Gold: Here’s What 2014 Will Bring

Source: Thinkstock

Source: Thinkstock

So far in 2014, the price of gold is up over 11 percent and trades at about $1,330 per ounce. It closed out 2013 at $1,200 per ounce, which was more or less the low of the year (the price did hit an intraday low of $1,180 per ounce in June, but it quickly rebounded). Investors have expressed a lot of negativity by selling off the shares of gold miners and the SPDR Gold Trust (NYSEARCA:GLD). Furthermore, several institutions have come out with negative calls on the gold price — from Credit Suisse to Goldman Sachs – despite the fact that they had been bullish on the gold price when it was trading higher.

Investors seem more comfortable with the idea of holding gold in this market. 2014 has been a stellar year so far for gold mining shares, with the Market Vectors Gold Miner ETF up 24 percent versus the Dow Jones Industrial Average, which is essentially flat. Furthermore we recently saw data that the SPDR Gold Trust is beginning to see inflows again.

This renewed confidence in gold is due to a couple of factors. First, gold hit what was essentially a double bottom in December, as the price reached the $1,200-per-ounce low that it hit in June and then began to move higher. A double bottom is typically a relatively strong technical signal that there are value buyers who are interested in owning an asset at that level.

Second, while stocks aren’t down for the year, we have seen some negativity begin to enter the equity markets. Stocks essentially went straight up last year, and now we have begun to see some volatility enter the market. With stocks showing volatility and trading near all-time highs, equity investors are rightly cautious, and some of the money that would have otherwise gone into equities is finding its way into gold.

Third, we have seen social unrest and political chaos in Turkey and Ukraine. These sorts of events tend to drive investors into “safe haven” assets, including gold.

Ultimately, I am bullish on the price of gold. The money supply has been growing rapidly, which means that the dollar is losing value. Furthermore there is a lot of demand for gold from Chinese and Indian investors. Chinese and Indians are becoming more affluent, meaning they will be able to purchase more gold. We are also seeing an increase in gold demand from central banks, which, until just a few years ago, was negative.

Still, given that the gold price is up 11 percent for the year and given that some of the negativity is coming out of the market, it might be time for a pullback to a previous resistance level such as $1,300 per ounce or even $1,270 per ounce. These sorts of pullbacks are common in bull markets, and they are healthy insofar as they drive out short-term momentum traders who don’t own gold because they believe in its fundamental value but solely because its price is moving higher.

Thus for traders, now is probably not a great time to get into gold. Look for better opportunities in the next couple of weeks. Longer-term investors should only be in the market, as I am, because they believe that the market is going to move substantially higher in the long run. For these sorts of investors it really doesn’t matter whether you buy at $1,330 per ounce or $1,300 per ounce. The best strategy is to dollar-cost average, meaning that you decide beforehand on a certain amount of money to spend on gold each week or each month and buy regardless of what the price is doing. This takes most of the emotion out of the trade, and it allows you to look at the bigger picture.

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