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Trader, analyst and instructor with a 6-year experience

Gold prices drop in the year 2013 caught many investors by surprise. The yellow metal hit a historical high of $1920 per troy ounce in September 2011 and there was a wide-spread expectation for the price to continue the rally after some correction. However, bullion has already depreciated by 26% since the beginning of the year and by 33% from the 2011 peaks. Gold has been trading slightly above the $1200 mark since summer 2013.

Global economy has substantially recovered since 2011, giving a boost to risk appetite. Today the growing equity markets are much more attractive than safe, but boring investments like gold. This kind of logic has pressured XAU in 2013 and is expected to stand in the year 2014, if nothing catastrophic happens to the market sentiment.

Tapering - bearish for gold

The Fed has unexpectedly (or not?) announced the $10 billion QE3 tapering in December. Why haven’t we seen any immediate market reaction on the announcement? The answer is very simple; tapering is not really equal to tightening: monetary stimulus is still in place and is still huge.

However, the US monetary policy change will definitely impact the gold prices in 2014. Everyone understands that the era of loose monetary policy and cheap US dollar comes to an end. Real interest rates are gradually rising – the US 10-year Treasury yield has already recovered substantially. What’s more, when the bond-buying program is over, markets will switch to the expectations of a rate hike. Gold will gradually become less and less attractive for investments as it will bring lower yields than the financial assets.

Subdued inflation

Demand for gold is traditionally high in times of a high inflation. Investors turn to the yellow metal as a store of value in an attempt to mitigate the inflationary risks.

This year we’ve seen the major central banks have faced deflationary pressures. We are living in a time of subdued global inflation – there are no visible reasons for a significant money supply increase. Liquidity remains subdued even despite the central banks’ easing: the “newly-printed” money doesn’t reach the real economy, staying in the banking sector. Gold price is unlikely to increase in a period of a low and stable inflation.

Demand patterns

 

According to the World Gold Council report, Q3 physical demand for gold dropped by 26% year-on-year. In 2013 investment demand for gold contracted significantly, while demand for jewellery stagnated. Improvement of the global economy is generally good for metals, but the percentage of gold usage for industrial purposes is relatively small (see the diagram below). Central banks are still buying gold with diversification purposes, but this demand doesn’t offset the slowdown in other areas. All in all, our analysis doesn’t unveil any implications for gold appreciation in 2014.

 2014 forecasts

At the end of the year 2013 gold is trading a little bit above the June 3-year low of $1180.0. As can be seen from the monthly chart, the wide bullish Ichimoku cloud has narrowed and is ready to turn negative.

Bullion price remained quite resilient for now, but I expect it to break below the $1180.0 support in the coming weeks and to extend the decline. My bearish target for Q1 2014 2lies at $1080.0 (50% Fibo). All the rebounds will be seen as corrective as long as the $1300 resistance holds.

 

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