Bounce in gold doesn’t disguise annual slump

Spot gold has risen in price today after hitting a six-month low earlier in the session, but the precious metal has had a terrible 2013.

Spot gold was trading up 0.5% at $1202.7 per troy ounce by mid-afternoon in New York, but the small fillip in its price as the end of the year draws close provides little to no gloss to a fundamental picture that is far from shiny.

2013 has been characterised by an impressive stock market rally against the backdrop of a strengthening US economy. The economic recovery has advanced far enough, in fact, that the Fed will start reducing the size of its monetary stimulus in January and should the recovery continue on its current trajectory, we could see the Fed remove its stimulus completely at some point in 2014. None of this is good news for gold.

Gold bugs will have spent this year looking with envious eyes at the stock market’s 29% gain, while gold has moved a similar percentage in the opposite direction. When the Fed began its first round of quantitative easing in late 2008, there were fears that an inevitable consequence was higher inflation and a weaker dollar and this drove investors into gold as a way of hedging against both.

Not only did rampant inflation never materialise though, the Fed is currently wrestling against inflation that remains stubbornly cool to the point that deflation is a concern. Since mid-2011, the dollar index has risen and we would expect the Fed’s tapering to support this trend, all other things being equal.

Back in the dark days of the financial crisis, when markets were plummeting, gold no doubt looked an attractive safe haven, but fast-forwarding to the end of 2013, a year in which investment opportunities have abounded, it is a very different story. Should the economy and stock market continue in 2014 in the same vein as 2013, gold could be in for another difficult year.

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