Why Gold Is Set To Enjoy A Bumper Bounceback In 2014


The hefty gold price collapse seen in 2013 was one of the year’s biggest investment stories, the metal conceding more than 27% over the 12 months and punching its first annual loss since the turn of the millennium.

A combination of factors drove prices through the floor last year, from bubbly investor sentiment through to expectations of Federal Reserve monetary tapering. But prices have stabilised in recent months — indeed, gold has added around 10% since the start of 2014 to $1,330 per ounce — leading many to question whether the yellow metal is set to surge once again.

Indeed, I am a steadfast believer that enough macroeconomic uncertainty remains to drive prices skywards in 2014. And if you share my bullishness on gold’s prospects this year, then exchange-traded funds (ETFs) SPDR Gold Trust (NYSEMKT: GLD.US) and Gold Bullion Securities (LSE: GBS) are fantastic ways to gain on a rising metal price.

ETF demand starting to snap back

World Gold Council (WGC) data released this week underlined the extent to which investors switched out of safe-haven assets such as gold in 2013 and into riskier assets like stocks and shares.

Total investment demand shrunk more than half during the period, to 773.3 tonnes from 1,568.1 tonnes in 2012. This collapse was driven by a vast swing in ETF flows, the market recorded an 880.8-tonne outflow in 2013 versus inflows of 279.1 tonnes the previous year.

However, the breakneck speed of ETF unwinding has undoubtedly slowed since the back end of 2013, and these funds actually appear to be experiencing inflows once again. Expectations of reduced quantitative easing by the Federal Reserve appears to have been priced into the market, while fears of escalating volatility in developing markets — in addition to concerns over Chinese economic cooling — have pushed safe-haven investments back in vogue.

Look East as physical demand canters

Meanwhile the latest WGC numbers showed the increasing importance of Asian physical demand on the gold price, a situation likely to propel gold higher should investment demand continue to recover.

Total consumer off-take in China hit record highs of 1,065.8 tonnes in 2013, surging more than 32% as jewellery, bar and coin demand surged. Although the collapsing gold price has much to do with this, demand continued to rise in October-December even as prices stabilised, indicating the strength of underlying demand in what is now the world’s number one gold market.

As well, news that Indian gold demand rose 13% in 2013 to 974.8 tonnes, even in light of heavy government import and sales restrictions, bodes well for future prices. Strong consumption before these measures were introduced, combined with substantial volumes of smuggled gold entering the country, drove full-year consumption higher the WGC noted.

With news that the government is considering slashing import taxes on the metal in the near future, a more-than-likely scenario in my opinion, and personal income levels continuing to rise, I expect gold purchases from India — and indeed the Asian continent on the whole — to surge still higher in coming years.

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> Royston does not own shares in SPDR Gold Trust or Gold Bullion Securities.