Price of Gold in 2015: Can It Regain Its Luster?

Source: Flickr user tao_zhyn.

Gold has essentially gone nowhere in 2014, as spot prices for the yellow metal have barely budged despite plenty of geopolitical and global economic turmoil to charge up fearful investors seeking safe-haven investments. Given that gold hasn't been able to get back on track after its 12-year bull market ended two years ago, an increasing number of investors have questioned whether the gold market will perform better in 2015. Let's look at some of the issues that gold has dealt with lately and how they'll affect the precious metal in 2015 and the long run.

What's next for the price of gold in 2015?

The biggest challenge that the gold market has faced in 2014 is likely to continue to play a role in holding back gold prices in 2015. So far this year, the Federal Reserve has played a key role in the yellow metal's price, with the central bank's decision to end its quantitative easing program having signaled imminent rate increases that are likely to begin before the end of 2015.

Source: Wikimedia Commons.

The Fed's moves have hit the gold market in several ways. First, higher rates mean that gold investors have to pay more to finance their gold purchases, giving up the higher interest income that's available from traditional income-producing investments. In addition, high rates in the U.S. tend to bolster interest in the U.S. dollar compared to foreign currencies, and dollar strength typically hurts gold prices. Combine those factors, and most analysts believe that the first half of 2015 in particular is likely to feature weakness in the gold market.

Price projections on gold (per ounce)

Source: Analyst projections.

Where gold goes from there, though, is the source of considerable debate. Some economists believe that if the U.S. economy continues to improve, with unemployment rates falling and GDP growth starting to pick up steam, then the Fed will probably start to return short-term interest rates to more normal and sustainable levels sooner rather than later. The middle of 2015 is a popular prediction for when the Fed could start to raise rates, and monetary policy moves could continue to keep gold down throughout the rest of the year.

The big question is whether inflationary pressures start to pick up. The recent plunge in oil prices has led many economists to reduce their estimates for inflation rates in 2015, as energy costs work their way into the prices of most consumer goods. Less wealth from energy-asset owners could weigh on their ability to spend and put upward pressure on prices, especially of luxury items. If inflation remains low even as unemployment falls further, then it would be the worst of all worlds for the gold market.

But some factors could support gold. In India, which has traditionally had a large appetite for gold, the easing of import restrictions could add physical demand to the world gold market. The election of a pro-business leader in India has led to major stock market gains, and that wealth effect could spur more gold buying among Indian investors. In addition, if a true currency crisis spreads beyond Russia's borders to encompass more of Eurasia, then the reflexive move toward gold could finally put a floor under bullion prices going forward.

Gold jewelry is a vital source of demand. Source: Bollywood Hungama via Wikimedia Commons.

Look out for the miners

Mining stocks also play a vital role in determining gold prices, as their decisions on how to navigate the gold market determine how much supply there will be in the market. On one hand, a drop in energy prices could help gold miners cut costs, and that could spur further mine production even with gold prices at relatively weak levels. At the same time, though, the failure of gold to rebound will probably make most gold mining companies think twice before expanding their capital expenditure budgets, especially with some of the negative impacts that could send gold prices in 2015 even lower than they are today.

One bad sign in 2014 was the extent to which gold miners hedged their future production by selling futures and other derivative contracts. With an estimated 1.84 million ounces of added hedging activity during the first nine months of 2014, miners returned to a strategy that they had largely given up on in the face of gold's bull market during the 2000s. If further hedging occurs, it could also push gold prices down in 2015.

The only thing you can be sure of

As nice as it is to think you can predict where gold prices will go, looking at last year's predictions for what gold would do in 2014 show just how unreliable looking into the future can be. Until the next unpredictable event occurs, though, it appears that many of the conditions that have helped keep gold prices in check this year aren't likely to end in 2015. As a result, gold investors should prepare for at least the substantial possibility that the price of gold in 2015 won't bounce back very far.

The article Price of Gold in 2015: Can It Regain Its Luster? originally appeared on Fool.com.

Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.