Is Gold the Perfect Investment for Contrarians in 2014?

After posting their worst annual performance in decades, precious metals managed to catch a break at the start of the new year. The price of gold and silver welcomed the recent calendar change with a strong rally, but even contrarian investors should not forget the lessons of yesteryear.

While stocks across the board suffered a hangover on the first trading day of 2014, the price of gold jumped nearly 2 percent to close at $1,225.50 per ounce, while the price of silver surged almost 4 percent to finish at $20.13 per ounce. It was the biggest gain for gold in three weeks and the biggest one-day increase for silver since September.

The strong start is a nice change of pace for precious metal investors. However, the current downtrend is still in place, and 2013 proved that even safe havens can fall out of favor with the market. Last year, gold plunged $200 in a matter of only two days during April and logged its worst one-day percentage drop since 1980. It was also gold’s largest decline in dollar terms on record. Gold even fell 5.5 percent in November, a historically a strong month of gains for gold.

By the end of 2013, gold and silver prices plunged 28 percent and 36 percent, respectively. It was the biggest annual decline for both precious metals since 1981, and gold’s first negative year since 2000. Furthermore, investors pulled nearly $40 billion from gold funds last year, the highest amount on record.

The miners in the precious metal industry performed even worse. Shares of the Market Vectors Gold Miners Index ETF (NYSEARCA:GDX) crashed 54 percent last year. In fact, Newmont Mining (NYSE:NEM), one of the largest gold miners in the world, was the worst performer in the S&P 500, with a loss of 50 percent.

Despite the terrible performance of precious metals last year, contrarian investors could not ask for a better setup. Hardly anyone expects gold and silver to perform well in 2014, and many analysts have recently cut price estimates. In December, UBS cut its 2014 price forecast on gold from $1,325 per ounce to $1,200 and slashed its silver estimate from $25 per ounce to $20.50. UBS believes the downward momentum could ultimately take gold prices to $1,050 per ounce. Additionally, Goldman Sachs says gold will probably drop at least 15 percent this year.

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Disclosure: Long EXK, HL, PHYS

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