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Why gold is set to soar in 2014

Most analysts have taken a dim view of gold, with most predicting prices lower than today’s price of around US$1,240 an ounce.

But my view is that they’ve got it wrong… just like they did last year.

Heading into 2013, gold had fallen slightly from US$1,800 to around US$1,675, an ounce. Most analysts were forecasting prices higher, with some expecting the price the rise above US$2,000 an ounce.

(At the time, some commentators, perhaps looking to put their name up in lights, were suggesting US$5,000 an ounce wasn’t far away).

Unfortunately, gold experienced its worst year in more than 30 years, leaving many commodities analysts with egg on their faces. Spot gold fell 28%, but gold mining stocks fell even more. The S&P/ASX All Ords Gold Index slumped 61% – although internal issues at Australia’s largest gold miner, Newcrest Mining (ASX: NCM), which makes up a big chunk of that index, saw it drop 65%.

CIMB analyst David Coates has told the Australian Financial Review, “the market is taking a less bearish view on the gold price and that it will settle at a higher level than people have factored in.”

At current prices, many gold miners will struggle to make a profit, and as a result high-cost mines are being closed around the world. Gold exploration is struggling because the cost of producing the gold, particularly here in Australia is close to or higher than the spot gold price.

In the US, tapering of quantitative easing has begun, and most commentators expect quantitative easing to end by the end of this year. What that means is that the US economy is recovering strongly, and is likely to see higher levels of growth, a higher US dollar and potentially, higher inflation.

With gold seen by many as a hedge against inflation, we could see demand for gold climb and the price head higher. For Australian gold miners, the bonus is if the Aussie dollar falls further against the US dollar. That could be good news for the likes of Silver Lake Resources (ASX: SLR) and Northern Star Resources (ASX: NST).

Foolish takeaway

Mr Coates has also identified Resolute Mining (ASX: RSG) and Troy Resources (ASX: TRY) as amongst the lowest cost gold producers – and likely to be more resilient should the gold price fall further from here. Now may be the prefect time to add these stocks to your watchlist.

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Motley Fool writer/analyst Mike King owns shares in Silver Lake Resources. You can follow Mike on Twitter @TMFKinga

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