How Will the Price of Gold Evolve Into 2013, 2014 and Beyond? A Perspective

Edited for posting on munKNEE.com

The price of gold has risen sharply in this millennium and, so far, the trend is continuing with fluctuations. How will the price of gold, however, develop in 2014 and in the following years? [Read on as] we try a look into the future. Words: 2600

So writes Christian Haese (www.trustablegold.com) in edited excerpts from his original article* entitled Gold Price 2014 – How will the price of gold develop in the coming years?.

 This article is presented compliments of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) andmay have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

The price of gold is determined by supply and demand

As it is the case with any other freely tradable good, the price of gold is determined by supply and demand…In case of excess demand, the price of gold rises until demand matches supply. Conversely, in case of a surplus of gold, the price of gold goes down until the entire supply is in demand.

Demand for gold – the four pillars

The demand for gold comes from four areas:

Source: World Gold Council

Development of Individual Demand Factors

Over the five years from 2007 to 2011:

•  the industrial demand for gold for technological applications has remained nearly constant….
• the demand for gold jewelry – traditionally the most important item of the total demand for gold – has declined  by around 18%….
• the investment demand increased – based on the demand for gold in metric tonnes – by almost 130% from 2007 to 2011.
• Central banks, who for years on balance sold more gold than they bought, have become net buyers since 2010. In 2011, the purchases by the central banks were almost as high as the total gold demand from the technology sector.

Source: World Gold Council

Future Demand Expectations By Area

It is very difficult to forecast the demand for gold for 2014 and the coming years.

Jewelry Demand: The demand for gold jewelry comes [primarily] from Asian countries, especially India and China. The increase in jewelery demand should continue given the positive economic development of these countries and increasing prosperity.

Investment Demand: Investment demand, however, is developing in the opposite direction. In Western countries, gold is often seen as a store of value or as an insurance protection against crises. In times of economic uncertainty or even acute crises, demand for gold as an investment tends to increase. In recent years, gold…became more and more easily accessible for retail investors through the advent of new financial products on gold, such as funds, as well as non-regulated products such as vaulted gold. These new products facilitate an increasing private demand for gold as an investment.

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Central Banks: There are several scenarios with regard to the demand for gold from central banks. On the one hand, the central banks of emerging market economies, in particular, could adjust their gold holdings further to the level of many developed countries. On the other hand, countries with a precarious debt situation may be forced to sell gold holdings in order to reduce their debt.

Supply of gold – mining and recycling

The supply of gold generally consists of the amount of gold mined annually and the amount of recycled scrap gold coming back into the gold market.

Source: World Gold Council

The current supply of gold is about one third higher than the supply of gold was 10 years ago.

Recycling: Compared to 2002, the annual quantity of gold coming back into the market by way of recycling in 2011 almost doubled because the rising price level made sales of scrap gold more attractive. The amount of recycled gold is beginning to decrease despite the high price of gold, [however, probably because of] the fact that a large share of scrap gold holdings were already sold over the last [few] years.

Mining: Actual mine production has increased only about 15% [since 2002 but only] slightly in 2011 compared to 2010…[offset by the significant reduction in] so-called “de-hedging” [by] mining companies…[which has] resulted in an increased supply of gold available in the market (i.e, the mining companies themselves bought less gold to close open hedging positions).

The mining of gold is getting less productive and more expensive due to less rich deposits, and for the next few years no significant increase of mining supply is expected.

Thus, the supply of gold will remain rather constant in 2013 and 2014 and from a supply side perspective no negative pressure on the gold price is to be expected.

Momentum and fluctuations in the gold market

The total amount of gold ever mined worldwide currently has a value of about 9,000 billion U.S. dollars. Daily, only a very small part of this quantity is traded in markets. Therefore, sales or purchases of large quantities of gold hitting the market can affect the price greatly.

The emergence of new investment products and the activities of financial investors have made the gold price more susceptible to price fluctuations.

The volatility of the gold price has increased significantly and there is no change in sight for 2014 and the next few years.

Trends and possible scenarios for the gold price

Due to the many supply and demand factors and their interdependencies, a reliable forecast of the future price of gold in 2013, 2014 and beyond is very difficult. Below, we discuss possible scenarios and trends as well as their potential impacts on the gold price.

1. Uncertainty and financial crises

The financial crisis has led to a sharp increase in demand from private investors and central banks. If the uncertainty persists or perhaps even escalates again, this could drive the gold price further up, for example in case of a possible euro-exit of Greece or an escalation of debt problems in other countries like the United States or Japan.

2. Inflation and depreciation of money

One argument of Western investors in favor of the purchase of gold is the fear of high inflation and thus a loss in value of money. In the wake of the debt crisis and the measures to ease monetary policy, this may be a legitimate concern, however, in recent years inflation has been low and some experts rather expect deflation than inflation in the short term.

In emerging economies, such as China or India, however, the situation is  different: in those countries, the respective inflation rates are high by our standards – sometimes even in the high single or low double digits. This is not due to the debt crisis but due to the high economic growth in these countries.

Unlike in the developed economies, in China and India a strong investment (and jewelry) demand for gold is expected  in case of  a further positive economic development.

3. Normalization of the situation

Accordingly, in case of an economic recovery in the West – if there is a solution to the debt crisis – there would be opposing effects on the gold price. The very high investment demand would decline in the West and we could probably not expect to see a compensation by an increase in demand for gold jewelry.

In emerging countries such as China, however, a global economic recovery should lead to further growth and thus greater demand for both gold jewelry and gold investments (which are used in these countries to hedge against local inflation).

4. War and political crises

A geopolitical crisis or a war – for example, a military strike by Israel against Iranian nuclear facilities – would probably quickly drive up the price of oil as well as the price of gold. Let’s hope that does not happen….

5. Demand from private investors

According to a  study conducted by the scientists Claude B. Erb and Campbell R. Harvey, the value of all mined gold currently represents around 9% of the global wealth in stocks and bonds. However, if only investment gold is considered, the rate is just 2%. When looking at the investment behavior of individual investors, one notices that only a small number of investors is actually really invested in gold. If gold should continue to establish itself in the portfolios and assets held by private investors, this could lead to a large additional demand and consequently to a sharp rise in the gold price.

This trend could be facilitated by further new gold investment products which make an investment in (physical) gold easy for private investors. Such products include, for example, vaulted gold.

6. Behavior by the central banks

Predictions regarding the future demand from central banks are also difficult to make. [On one hand,] in the wake of the debt crisis, countries such as Portugal could sell gold held by them, which could potentially result in a decrease of the gold price. On the other hand, a large part of the official sector demand in recent years came from central banks of (former) developing countries such as China. China only holds about 2% of their reserves in gold compared to Western countries such as Germany and the United States who hold more than 70% of their reserves in gold.

The amount of gold held by China has more than doubled – measured in metric tonnes – since 2000 and if, for example, China were to diversify its foreign exchange reserves further and invest a portion of them in gold, this could lead to a huge demand and could have a positive impact on the gold price.

In the so-called “Washington Agreement on Gold”, the central banks of many countries with large gold reserves and the Bank for International Settlement (BIS) and the IMF have agreed to sell only a specific quantity of gold annually. In 2009, the agreement was extended until the year 2014. Therefore, no negative price pressure is expected from this side in the short term but the mid-term outlook beyond 2014 is unclear.

Gold price predictions by analysts

The current analyst predictions regarding the price of gold for the years 2013 and 2014 differ, but seem to be mostly positive.

Hussein Allidina of Morgan Stanley’s, assumes…that gold will be the most attractive commodity in 2013, and expects…an average price of $1,853/ozt. This represents an increase of almost 9% compared to the current gold price of about 1,700 U.S. dollars. He justifies this with:

• a weaker U.S. dollar due to the low interest rate policy,
• the purchase of mortgage-backed securities by the Federal Reserve,
• the unlimited purchase of government bonds program of the ECB,
• gold purchases by central banks,
• the high demand for gold ETFs and
• the recovery of gold demand in India.

Goldman Sachs, however, has recently reduced its forecasts for 2014 and now forecasts a gold price of $1,750/ozt.. The bank considers it likely that the current gold bull market will end in 2013. It argues that the gradual rise in real interest rates due to the improved growth prospects for the U.S. economy is likely to more than compensate the impact of further monetary easing by the Fed.

Deutsche Bank has raised its forecast for the price of gold for the years 2013 and 2014, justifying this with the unlimited purchase program of the U.S. central bank. Against this background, a rise in the gold price is only a matter of time. For 2013 the bank predicts a gold price of $2,113 and $2,000/ozt. for 2014.

Bank of America Merrill Lynch forecasts a gold price of $2,400/ozt. for the end of 2014. Key price drivers are expected to be interventions by the Fed and the European Central Bank. According to their analyst MacNeill Curry, the gold price could ultimately reach $3,000 to $5,000ozt..

HSBC analysts James Steel and Howard Wen  predict an average price of gold  of $1,850/ozt. for 2013 and an average price of $1,775/ozt. in 2014.

Conclusion for the gold price in 2014 and beyond

Like other asset classes, a gold investment is associated with risks. The price of gold can fluctuate strongly in the short term and also in the long term. Over very long periods of time gold does show a high and – from our perspective – unique stability or wealth preservation. However, such periods can be too long for individual investors.

On the other hand, for any risk averse investor an addition of gold contributes to the diversification of his/her investment portfolio. Due to the low correlation of gold with other asset classes, a gold investment reduces the (price) risk for the investor and therefore can reduce potential losses.

As is true with other forecasts, the future price of gold can not be predicted reliably. The factors influencing the price of gold are varied and there are many interdependencies. In the event of a further escalation of the financial crisis or the emergence of new crises, the price of gold may continue to rise strongly as a result of the supposed function of gold as a “safe haven”. This might also be the case if the current uncertainties continue: generally speaking, uncertainty seems to be a good breeding ground for a rising gold price.

If, however, the current “bull market” (recovery phase) stops one day, for example, as part of a solution to the global financial problems, the gold price could also fall again – potentially over many years or even decades, until the next upturn happens.

Professional and courageous investors can speculate on a specific gold price development. For safety-oriented investors it is recommended – also in light of the lack of a regular income or interest from a gold investment – to view gold…[as] a form of insurance. Unlike possibly individual stocks, bonds and other securities, gold will never lose its value completely. Conservative investors should invest only a portion of their total assets in gold.

As with all investments, investors  have to consider cost and safety aspects when choosing a specific form of gold investments. The cost of buying and the annual costs of a gold investment can greatly affect the rate of return and thus have a big impact on the final value of the investment at the time of sale.

With regard to the safety of an investment, investors should not only take the possible price of gold into consideration but also potential risks that may be limited to certain products or suppliers. On our website, we compare prices and safety aspects of various vaulted gold products on the basis of transparent criteria.

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*http://www.trustablegold.com/gold-price-2014/

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