Was the Gold Spike a Total Fluke?

04/28/2014 7:00 am EST

Focus: COMMODITIES

Three key factors in the early-2014 gold spike may be cooling off; where should investors go from here in the suddenly unpredictable gold market, asks Felipe Jones?

Historically speaking, one of the biggest factors that tempts investors into buying gold is stability. As a precious metal with worldwide value, gold is often viewed as being somewhat immune to some of the risks and economic shifts that make more conventional investments tricky to navigate. But if this is how you've approached gold investment in the past, you may have noticed by now that it's time for a shift in thinking.

Simply put, gold has been surprisingly erratic over the past six months. After 2013 saw gold prices decline more than they had in any year since the 1980s, predictions were all over the place for the precious metal heading into 2014. Would it rebound dramatically toward its highest-recorded prices? Or would gold continue to disappoint investors?

As it turns out, the price of gold has remained somewhat inconsistent thus far in 2014. Gold started the year on a roll, rebounding impressively from its December lows, and as stated in an article in late March, the expectation was that the rebound would ultimately take gold to the $1,420-per-ounce price that some investors predicted we'd see in 2014. However, with the price of gold already starting to settle back toward a level in between the shocking December low and the bullish $1,420 prediction, it's becoming clear that the early strength of gold in 2014 may have been at least something of an aberration.

But how-other than simply looking at price trends-can we determine whether or not the early 2014 surge was, to some extent, a fluke? In late March, in an article discussing Goldman Sachs' assertion that the gold rally wouldn't last, Money Beat put forth three interesting theories, all of which appear quite sound a month later.

These three theories are that the harsh winter in the US slowed economic activity (this, really, is a fact more than a theory); that an underperforming Chinese economy helped to boost gold prices; and that the tensions between Russia and the Ukraine also played a role, as major international conflicts or tragedies often sway investors to pursue safety in precious metals. Really, there was never any question that these were three of the main factors in helping to drive up gold prices, along with the simpler fact that gold being cheaper than it had been in years likely attracted many buyers as well. The question, rather, was whether the impact of these factors would subside over time.

It is beginning to appear as if the answer is yes. The weather in the US was bound to improve at some point, and with the country now free of dramatic winter storms, it's only natural for the economy to receive a slight boost. China, meanwhile, has recognized its slowing economic growth and as detailed by BBC earlier in the month, the country is taking measures to reverse the trend. Also, fears over escalation of the conflict between Russia and the Ukraine have diminished some, though that remains the situation perhaps most likely to surge back into action. As a result, it could still potentially scare investors into "hedge" opportunities like gold.

In looking at these three contributors to the spike in gold early in 2014, the Money Beat article goes on to note Goldman's projection of a $1,050/oz year-end price for gold. This sort of a low feels slightly dramatic, even if the three factors analyzed all stabilize to some degree, but the question for investors has become this: should gold be avoided entirely?

Generally speaking, investing advice shouldn't come in the form of absolute statements. Everyone has a different strategy for approaching investments and people read financial markets and trends in different ways. But one interesting suggestion can actually be found in the form of some general advice offered at one of the leading online gold bullion purchase and reference sites. BullionVault has plenty of information on buying gold for those with interest in pursuing such an investment, but it also includes an intriguing line from iTulip founder Eric Janszen: "If you're going to own gold, the nature of the risk you are hedging is such that owning stocks in mining companies and ETFs don't cut it, you need to own the physical stuff."

Mr. Janszen's quote shouldn't be taken as absolute advice either, but it is a nice reminder for potential investors that there are multiple forms of gold investment. All of the turmoil and disagreement over gold's performance, thus far, and general outlook for 2014 is of a predictive nature. However, for those simply looking for a hedge, it's worth considering that physical gold bullion as a long-term investment, well beyond 2014, may ultimately provide stability in a financial portfolio. Playing the current trends and projections, however, will leave investors subject to what has become a surprisingly volatile and unpredictable pattern for gold prices in the short term!

By Felipe Jones

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