After gains of around 30% in 2007, 2009 and 2010, investors in gold are no doubt asking themselves whether the precious metal can reverse last year's 28% decline (in US dollar terms) or whether further falls are in store in 2014.
The situation is even direr for investors in gold mining stocks, many of which have experienced share price declines during 2013 far greater than the fall in the gold price. For example Newcrest (ASX: NCM) now has a market capitalisation of approximately $6.6 billion after a 65% fall in its share price over the course of 2013. Meanwhile Regis Resources (ASX: RRL) and Resolute Mining (ASX: RSG) fell 44% and 65% respectively and now have market capitalisations of $1.6 billion and $394 million respectively. In comparison, investors who simply owned an index fund which mimicked the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) have received returns close to 15% before dividends over the 12 months.
According to CNBC, 2013 saw gold post its first losing year since 2000 and its worst year since 1981. There would appear to be two major reasons that gold lost its appeal during 2013.
Firstly, the US Federal Reserve's announcement that it will begin to ease and ultimately end bond purchases – or 'taper' – has decreased the chances of inflation caused by pumping excess amounts of money into the system. The lower likelihood of runaway inflation removes the need to hold gold as a store of value.
Secondly, indicators including the Federal Reserve's commentary and actions suggest that the chance of a major prolonged slowdown in the US economy appears to be easing. Conversely, the chance of a sustained pick-up in the US economy appears more likely. This has led investors to abandon gold in favour of equities which are relatively more appealing in an economic upturn.
Foolish takeaway
I think a major concern for many investors in gold mining stocks is not only the risk of further capital losses but also the level (if any) of dividends the sector will be able to sustain in 2014. In contrast, the outlook for a number of industrial stocks in 2014 is positive and some dividend yields on offer are particularly appealing.
