Sunday, January 13, 2013

What's in Store for the Price of Gold in 2013?

Gold functions as a speculative instrument, a safe haven, inflation hedge and as a commercial product. Gold has a central role in relation to currencies and as an economic indicator. Perceived economic/political uncertainty, inflation and money supply all have an effect on gold prices. 

In 2013, several variables will be important: Government spending and accompanying loose monetary policy, inflation, and some chart indications that gold prices are behaving like an asset bubble. A summary ties together these various factors to conclude that gold is likely, but never certain, to drop in price over 2013.

Entrenched Entitlement Spending, Fed Actions
Entitlement spending programs are very entrenched in US politics and culture. Spending on welfare, Medicare and the military feeds too many local economies. Whoever drastically cuts entitlement spending will face wrath in the public arena and the voting booth. It is extremely difficult to see this trend reversing in 2013. In addition, the Fed will likely maintain its goal of a weaker dollar. Spending patterns and Federal Reserve actions favoring a weaker dollar are two variables that hint at a continued gold price increase during 2013. Increasing the debt ceiling and creating rounds of quantitative easing is far easier politically than insisting on a strict adherence to a strong currency. Since currency strength and gold tend to move in opposite directions, a weaker dollar implies higher gold prices.

The price of gold is complicated by the fact that gold is considered an inflation hedge, a currency in itself and a commodity. Low inflation will exert downward price pressure on gold while high inflation will very likely push gold prices above inflation rate. Without inflation or other financial uncertainty to hedge against, gold price tends to decrease.

Apparent Asset Bubble
In recent years, gold has spiked. Some have called it a bubble, with recent price swings hinting that the bubble may have popped. Consider that in 2007, the closing price of gold was $836.50 per ounce. In 2012, the closing gold price was $1664.00. This is an increase of nearly 99% in five years. A similar increase occurred between 1975 and 1980, with gold price going from $151 at the close of 1975 to $615 at the end of 1980. This earlier spike corresponded to over 300% price increase over five years. The bubble popped, with gold clocking in $400 per ounce at the close of 1981; a 35% loss during 1981. Though the recent gold bubble seems milder in percentage terms than the 1980 price spike, a similar technical dynamic seems to be developing.


Gold can be bought from brokers like Bullionvault  and UKBullion.  Despite trends towards continued spending and a weaker dollar, a technical perspective gives weight to the claim that gold prices will decrease in 2013. Gold jumped to roughly $1900 per ounce in 2011 and has been stuck between $1600 and $1800 during 2012. Though gold prices increased about 8% in 2012, a longer-term gold price chart indicates there is some uncertainty as to whether or not the gold rally will continue. Remember that asset bubbles are not rational in the sense that asset price accurately reflects underlying value. Asset bubbles are speculations based on investors counting on the "bigger fool" principle. A foolish investor may buy an overpriced asset in hopes that its continued price increase will entice a bigger fool to buy it from him in hopes of his own gains from an even bigger fool, et cetera. At some point, the foolishness stops. Prices stalled since the last few months of 2011. Unless sudden inflation or other economic/political uncertainty spooks investors, gold prices will likely decline by the close of 2013.