Eyes Wide Open: The 2014 Gold Outlook
In order to understand where gold could go in 2014, we have to examine some of the factors that held it in check in 2013. Without a doubt, the financial story of last year was Wall Street. The DJIA rose by almost 30% in 2013. Despite rising debt, political divides, government shut-downs, stubborn unemployment data, the health care debacle, and a frail recovery … the paper markets jettisoned to levels that took most by surprise.
There’s no doubt that gold took a hit in 2013, but the fact that it remained above the $1200 threshold with the Dow breaking all-time records 52 times, is a testament to its staying power. The taper-factor kept gold flat as hints about tighter monetary policy started as far back as May. It was not until December 18th that outgoing chair Bernanke announced that the Fed would only modestly cut its bond purchases from $85 billion a month to a still robust $75 billion a month.
There were other factors that were not favorable for gold in 2013. We saw a modest improvement in the unemployment rate which fell from 7.9% in January to a flat 7% at year-end. Interest rates also remained low for the year, only rising a little over a 1% since January of 2013. And with most new gold demand coming from the East particularly China and India, we cannot discount the impact of the Indian government’s action of imposing heavy duties on the import of gold.
Enter 2014 ... and its time to consider a market correction. Most experts expect the Dow to drop and the wolves to retreat, the question is by how much. The infamous taper announcement has now come and gone. The drop in easing has proven to be a “drop in the bucket” as the Fed is still buying up bonds at an unprecedented rate and printing massive amounts of money out of “not so thin air.” Incoming Fed chair Yellen has already indicated her comfort with the Fed’s accommodative position and appears unlikely to make any sudden changes.
The unemployment rate will also be tested in 2014 since economic growth is not keeping pace with previous recoveries. In addition, with the White House pushing to further prolong unemployment benefits coupled with booming disability enrollment and sky-rocketing food stamp registration … millions of Americans are matriculating out of the work force and onto the federal balance sheet further exacerbating America’s public debt. To say that the debt is unsustainable runs the risk of being disingenuous. According to the Congressional Budget office, US National Debt is now 73% of GDP, doubling since 2007 and reaching levels not seen since World War II. The potential strain on economic output speaks for itself.
While some are riding Wall Street’s high much of what ailed the American economy in 2013 remains with us … unprecedented monetary easing, mounting US debt, partisan politics, expanding balance sheets, growing asset bubbles, and subpar growth. 2014 will add some new challenges including first-time health care fines and mandates, added regulatory burdens, changes in immigration laws, renewed political instability in the Middle East, and slowing Chinese growth.
This is the year that we may ultimately reacquaint ourselves with risk. With Wall Street still volatile, QE still intact, Congress still in shambles, debt still rising, and demand for precious metals on the upswing … taking an “eyes wide open” approach to gold in 2014 could be the best market move for the New Year.