The Federal Reserve’s massive bond-buying program has supported gold and silver bullion by keeping interest rates low and dwindling inflation fears by flooding the market with cheap US dollars. However, gold is headed for its first annual decline in 12 years due to investors, supported by a recovering global economy, who pulled money from gold and channeled it into riskier assets such as equities. The U.S. budget deal avoiding a government shutdown in January which speedily passed through the House of Representatives overnight lifted the dollar to a five-year high against the yen. As always a stronger dollar is a negative for gold as it makes the metal more expensive to holders of other currencies.
Barring some strange crisis event, it seems highly likely the Fed will initiate a reduction in the stimulus starting in 2014. The December 17-18th meeting is scheduled and many believe the implementation of the reduction in quantitative easing will not be a smooth one in 2014. Many analysts see short sale trading of gold to continue up until the time the Fed starts the expected reduction of its aggressive bond buying program. An analysis of the data from QE1 of 2014 will have to be taken into consideration to determine the trajectory and pace of this tricky reduction expected to start in March. Five years ago when the Fed embarked on this ultra-loose monetary policy many analysts at the time said inflation would ramp up uncontrollably. So far this hasn’t happened with the U.S. consumer price index only rising 1% for the last twelve months well below the Fed’s expectation of 2.5%. Thereby, low inflation means investors don’t need gold to hedge against rising prices. Lest we not forget, the Federal Reserve prints money to purchase Treasuries and mortgage backed securities but it’s obvious from chart #1 that this spending has gone parabolic.
Many are speculating as to what 2014 will hold for the precious metals commodities market. Whether you believe that rapid inflation is still poised to come as a result of the massive monetary injections over the past five years or that a precarious deflationary cycle is more likely to come due to the innate design of Obamacare, both camps have great points as they eagerly await a tumultuous 2014. Interestingly most agree on some of the factors we are likely to see played out in 2014. For instance, asset managers, particularly western ones have large income flows coming out of ETFs and stocks are hitting all-time highs nearly on a daily basis, so these investors are not wanting to participate in gold at this time. Asian market changes, in particular, India’s government imposing import tax duties of 15% have especially made gold purchases slump for the largest gold buyer on the planet. The so easily forgotten monetary profits made from gold in the past are now being funneled into the soaring markets, with the Dow up 22.3%, the S&P 500 up 26.8%, and the Nasdaq up 34.7% for the year. Additionally, most agree that precious metals, although taking a beating in 2013, are ready for a long consolidation and correction within a slightly bullish market for all of 2014 and into 2015. For the medium to long-term investors looking to get into gold on a low may just have their opportunity in this coming year as the centralized banks seem to have satisfied their appetite for buying up the precious metal, see Chart #2. Let’s all remember the mid-70s when gold fell by 50% only to shortly thereafter head 850% higher and remember it was the centralized banks which sold their gold throughout the 80s up until 2008. In 2008, the centralized banks began buying and storing the precious metal to guard against potential inflation pressures from the initial QE rollout and the subsequent low interest rates by global central banks. As interest rates increase and as inflation fears subside the centralized banks may again like in the 80s become the lenders and sellers instead of purchasers of gold. Gold and precious metal outlook is improving day by day with expected downsides in the near-term, but the longer-term picture of gold seems poised for higher prices in 2014, because in a world where the centralized banks print fiat currency at record rates the true price of gold can and will no longer be held back from discovery.