Why gold prices won’t rise in 2014

The price of gold is on track for its largest annual fall in 30 years after declining 27% in the last 12 months. The drop has resulted in a bludgeoning in the share price of Australia’s listed gold miners.

Newcrest Mining (ASX: NCM), which was worth $24 per share at the start of this year is now able to be picked up for just $7.20 — down 70%. Silver Lake Resources (ASX: SLR) has lost almost 90% of its value to sit at $0.39.

Investors have been truly hung out to dry. But is there more pain to come, or will prices bounce back and ‘revert to mean’?

Unfortunately current signs suggest that gold prices will remain at or below current levels going into 2014. According to analysts, the price of gold will be kept subdued as the US economy strengthens and the US Federal Reserve cuts back quantitative easing, cutting demand for the metal considered a safe haven when times are bad.

The recent appreciation in the US dollar, as well as strengthening oil prices are considered two signals that the US economy is beginning to sprout again, while minutes from the Federal Reserve October meeting indicate as the economy rights itself a tapering of the US$85 billion bond buying program will commence.

Analyst forecasts agree. Goldman Sachs Group expects gold to trade at $1,110 in 12 months’ time according to Bloomberg, while UBS expects gold to average at $1,200 per ounce in 2014, down from a previous forecast of $1,325 noting that there are “limited positive catalysts” supporting the gold price.

Foolish takeaway

So the overall picture for gold prices going into 2014 is not pretty. Suppressed by a strengthening US economy and the tapering off of quantitative easing the traditional drivers of gold prices look to be missing heading into the New Year.

There is one beacon of hope for Australian gold producers however — a lower Australian dollar. Since gold prices are set in US dollars the appreciation of the US currency against the Aussie dollar will help to cushion the low margins felt by gold producers so far in 2013. In 2014 gold miners may need all the cushioning they can get.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned.

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