Is It Time to Get Into Gold & Silver?

Prices plummeted last year. Will they rise across 2014?

For stocks, 2013 was tremendous. For gold and silver, it was disastrous. Gold dropped 28.3% last year on the COMEX, and silver fell 35.9%. Gold closed 2013 at $1,202.30 an ounce, silver at $19.37 an ounce, and prices are still far below where gold bugs would like them to be.1,2

Why have prices gone so far south? Last year, commodities investors saw the writing on the wall – the Federal Reserve would soon be reducing its monthly asset purchases. Less easing from the Fed translates to a smaller money supply, implying rising interest rates and less upward pressure on the rate of inflation. In that scenario, there is less demand for gold at the world’s central banks.

The performance of the stock market also influenced the fall of gold and silver. As the year progressed, stocks just offered far better returns than precious metals. The bull run on Wall Street drew money out of other investment classes.

Are prices ready to rebound? If they do bounce back in 2014, it could be partly in response to underwhelming stock gains.

This year, no one is predicting the S&P 500 will gain another 29.6%. The index hasn't had back-to-back annual gains of 25% or more since 1997-98.3

In the last Reuters equity poll of 2013, stock market analysts projected the S&P gaining just 4.1% this year. It would be hard for the S&P to return 5-10% in 2014 without earnings of S&P firms rising by a similar amount. Will that happen? Some economists doubt their profits will match those of last year. You also have the tendency for investors to take profits after a great year for equities, and the Fed’s intent to wind down QE3 further. All that may send investors back to commodities – and back to gold and silver – with the hope of getting better yields.4    

Will buyers reemerge in the first quarter? Exchange-traded funds (ETFs) holding gold bullion were way down for 2013, encouraging some of their investors to harvest short-term losses before the year ended to offset gains. The IRS “wash sale” rules state that you can't deduct losses when you sell an investment and then buy the same (or very similar) kind of investment within a 60-day window surrounding the sale. The “wash sale” rules may or may not apply to gold ETFs – it is something of a gray area – but those investors might get back into those very ETFs this month or next.5,6

Or could the bear market in gold & silver persist for years? That is a possibility. While some commodities investors are confident gold and silver will rebound, others are not. Last June – when gold prices also slumped down to the vicinity of $1,200 – UBS lowered its 12-month forecast for the yellow metal, projecting the COMEX price at $1,050 by June 2014 and calling gold “obsolete” as a hedge given the inevitable decrease of the Fed’s stimulus effort. As recently as 2008, COMEX gold was down at $680 – and we can’t forget that gold futures were stuck in a bear market from 1980-99.7

Could silver recover more quickly than gold? Analysts see silver prices rising in 2014, but not greatly. As 2013 ended, Citi’s 2014 price projection for silver was $20.30; the 2014 estimate at UBS was $20.50. Merrill Lynch sees silver at $23.13 for the first half of the year but topping $25 in the second half. As for 2015, UBS projects silver at $21.00, Citi at $22.20 and Commerzbank at $24.50.8   

Silver has something going for it that gold doesn’t: ongoing industrial demand. If the global economy improves in the near future – and it certainly might – global industrial output may increase, and so may silver prices. So silver may be able to “decouple” itself from gold and exit its bear market faster.

Low bullion prices may lead to an opportunity. Investors are often reminded that gold and silver have no “intrinsic value” – their values are assigned by the free market. A commodities investor needs to have a strong stomach for risk in addition to his or her appetite for it.

That said, it may be time to take another look at gold and silver. If bullion prices have truly reached their floors, then a tantalizing opportunity may be presenting itself.

Rob Cryts may be reached at 978-256-1820 or rob@cfsinvest.com.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - coinnews.net/2013/12/31/gold-snaps-annual-winning-streak-silver-tumbles-in-2013/ [12/31/13]

2 - bloomberg.com/markets/commodities/futures/metals/ [1/9/14]

3 - 1stock1.com/1stock1_141.htm [1/7/14]

4 - tinyurl.com/olljn44 [12/31/13]

5 - tinyurl.com/o82ac3p [12/6/13]

6 - sec.gov/answers/wash.htm [12/31/13]

7 - tinyurl.com/nwb29at [6/26/13]

8 - fool.com/investing/general/2013/12/28/price-of-silver-in-2014-how-it-could-buck-golds-do.aspx#.UsyfyLSLXs8 [12/28/13]