Whither gold in 2014?

A personal view of where the gold price may be headed in 2014. Downwards then upwards ending the year perhaps 15-20% higher than at present but falling on the way there.

As we draw to the close of another very disappointing year for the gold investor, one might ask how much further the yellow metal has to fall before making something of a sustained recovery.  And while our track record on gold price prediction may have been pretty good prior to 2012, since the start of that year it has been decidedly out of sync with reality.  Perhaps one can do better in the current year?

On a basic reading of the current situation vis-à-vis gold, one might suggest that, in 2014, gold will end the year at a higher price level than it will likely begin it, but that does not necessarily mean there won’t be a few difficult months ahead before things start to get better.

Although, as the gold price falls, the potential for further downside risk diminishes.  Politicians have been adept, for the most part, in talking up the global economy and thereby building confidence among the general populace, however misleading the quoted, massaged statistics may be in reality.  Increased confidence means a return to the spending economy and this has transferred to the stock markets with nearly all major western stock indices rising, and, so far, continuing to do so.

Not even the beginning of tapering of the U.S. Fed’s bond buying program has put an end to that – yet. The Fed had appeared to be extremely nervous about the effects even a limited taper, as implemented, would have on the markets.  In the event,  the positive stock market reaction, aided by an upbeat statement regarding the U.S. economy from Ben Bernanke, to the announcement of the $10 billion a month cut.  This still, of course,  leaves a massive $75 billion a month of bond purchasing intact, suggesting that the Fed will likely announce a further probable $10 billion taper sooner rather than later.  Indeed the tapering program is likely to continue in further $10 billion cuts either until the bond buying program is weaned down to zero, or the Fed may call at least a temporary  halt if, and probably when, .the stock market starts to get nervous about the reduction in stimulus and turns downwards, possibly very sharply, and gold could then well be seen as a ‘safe haven’ again.

Overall though, U.S. policy – the current main gold price driver – does not bode well for precious metals prices in the short to medium term.  In the eyes of many investors, gold benefited hugely from the massive Quantitative Easing programs so, de facto, a cutting back will see gold fall – or that is the theory and takes no account of gold’s strong rise prior to any QE being implemented.  The stock market has proved to be a far better place for short term investment than gold for the past two years and there has been a major flight from gold bullion and from gold stocks.  This has been exacerbated by sales out of the gold ETFs, which had contributed so much to gold’s rise through the few years prior to any QE programs being implemented.. The easy access to gold provided by the ETFs also meant it was just as easy to liquidate holdings and with the mainstream bank and institutional financial analysts almost all predicting gold price falls the moves out of the gold ETFs became something of a rout.

But on the positive side for gold looking forward, all this gold sold out of the ETFs, together with new gold mine production, appears to have been fully absorbed by buyers in Asia , the Middle East and Former Soviet Union countries and this appears to have been accelerating in China in particular in the second half of the year.   Even with the draconian moves to curb gold imports into India, previously the world’s largest gold consumer, new gold supplies are disappearing into far stronger hands.  This year, India looks to have been overtaken comfortably by China as the world’s largest gold consumer, if indeed it was not last year as some analyses have suggested.

Most Western estimates of Chinese demand appear to have relied on net gold imports into the Mainland via Hong Kong, for which official statistics are published as though this is the only route by which gold is imported into the country.  But some comprehensive research by others, notably by Koos Jansen, suggests that considerable amounts of gold enter China by other routes too and total Chinese gold consumption this year will be well over 2,000 tonnes, rather than the 1,000 tonnes quoted by most media throughout the year.  With China’s own gold output in 2013 predicted at around 430 tonnes, it would seem that the Asian giant on its own may well be consuming virtually the full total of global newly mined gold production.  Indeed according to Koos Jansen’s latest investigations, over about the past week China’s gold  consumption has appeared to have accelerated in the run up to the Chinese New Year and has seen 55 tonnes of gold pass through the Shanghai Gold Exchange alone , which roughly equates to total global gold output over the same period.

The big unknown, though, as far as China is concerned, is whether the country’s government  is also accumulating unstated gold reserves over and above the 1,054 tonnes it has reported to the IMF for the past five years.  It may be significant that the country last announced an increase in its gold reserves in 2009 (with gold accumulated over the previous five year period but held in a separate account from its official reserves).  If it follows this pattern it could well announce another  big gold reserve increase in 2014 – but the real question is: if it does so, how big might this increase be?

There is something of a consensus appearing that China is indeed surreptitiously building its gold reserves, but estimates (blind guesses in truth) of the likely reserve if China does announce a significant increase range from around an additional 1,000 tonnes (thus virtually doubling its current reported gold reserve) to 5,000 tonnes and upwards.  Some believe the next Chinese reserve announcement will state that China’s gold reserve is actually on a par with, or greater than, the announced U.S. gold official holding of 8,133.5 tonnes.  Status is a particularly significant part of the the Chinese psyche and the feeling is that holding the world’s biggest reserve of gold bullion will hugely advance the nation’s financial acceptance in the eyes of the world and put it into a position to at least have a place in the global reserve currency which it sees as giving it huge trade advantages as well as enhanced global status..

There is also a feeling that China, having been encouraging its citizens to buy gold, will not be willing to see the price fall back too far and it certainly has the financial clout to intervene in the markets and put a floor under the gold price should it so wish to do so,

Is there any significance perhaps that 2014 will see China’s first state supported major gold conference – in September in Beijing?  The China Gold Congress and Expo is being organised by The China Gold Association with support from a slew of government organisations – notably the State-owned Assets Supervision and Administration Commission of the State Council, Ministry of Commerce, National Development and Reform Commission, Ministry of Industry and Information Technology, Ministry of Land and Resources.  Other major sponsors are the World Gold Council, Shanghai Gold Exchange and Shanghai Futures Exchange.  What better venue and occasion to make a new announcement on Chinese gold reserves and/or policy?  Any substantial increase in Chinese gold reserves could have a dramatic effect on the gold price.

While China may be somewhat reticent about publishing its gold reserve figures, the Indian situation since the government’s imposition of high taxes and controls on imported gold is even more obscure nowadays.  While official gold imports as recorded by the government have fallen back to a trickle for the past few months, a good proportion of the previous high levels of imports will be being replaced by smuggled gold – particularly from the Middle East with Indian prices at a substantial premium.  There are huge numbers of Indian labourers working in the Middle East and the potential for smuggling in gold by individuals in small quantities at little risk of being caught is enormous.  One only has to fly in to Thiruvananthapuram  (capital of gold hungry Kerala)  International Airport pre-dawn with five wide body jets arriving from the Middle East at around the same time, mostly carrying returning migrant workers,  to see what kind of chaos results and the impossibility of effective import controls.  With a similar daily situation at perhaps a dozen more airports, some far larger, across the country one suspects that thousands of kilograms of gold are being smuggled in by air alone on a daily basis,.  India also has long borders and an extensive coastline, all conducive to smuggling in gold, but of course there are no official records of any of this so Indian gold imports, and consumption, at present are very much an unknown, but they could well remain substantial.

Quite apart from Chinese and Indian demand the current gold price is only at around the average cost of newly mined gold production so there will be many uneconomic gold mines out there – some of significant size.  While high grading may temporarily boost global gold output this cannot last for long at the current gold price before mines start to close and production begins to fall.  When the gold price has fallen to cost of production levels beforehand this has tended to lead fairly rapidly to the start of a sharp upwards price movement.

There are also some huge short positions held on COMEX.  While these suggest that traders expect further downturns, should the metal price start to increase, short covering could drive the price up sharply – particularly if traders and investors start to demand delivery of physical metal rather than just rely on paper transactions.  The amount of gold available for physical delivery in COMEX warehouses has been falling quite dramatically.

So, in summary, what are the major events which could see the gold price appreciate in 2014?  Sales out of the ETFs slowing to a trickle, COMEX warehouses running out of available physical gold prompting more traders to demand delivery; China revaluing its gold reserves very sharply upwards; India cutting back on its gold import controls; a major conflagration developing in the still very unstable Middle Eastern and Arab North African nations perhaps also affecting Saudi Arabia and the Gulf States; Israel going its own way and bombing Iranian nuclear installations; a major hiccup in U.S. growth forecasts; the collapse of a major bank, or a necessitated rescue of a national economy; the beginning of a fall in new mined gold supply, etc. You can assess your own feelings for the likelihood of any of these occurring and their specific potential impact.

On the downside, perhaps most significantly, further Fed tapering without adverse general stock market reaction; the U.S. and Eurozone economies being seen to continue to improve with unemployment falling significantly and stock market growth continuing; a significant reduction in Chinese gold demand and imports; peace returning to the Arab states.

A personal view is that we will see gold ending the year north of $1400, but it may fall to $1100, or even less, on the way there before recovery starts to set in.  Perhaps another very choppy year ahead for the gold investor!

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