Will Gold Prove Some Investors Wrong This Year?

If gold made a New Year’s resolution to convince investors that it was undervalued and ignored for too long, then the precious metal is certainly keeping its commitment so far. After a dismal performance in 2013, gold is one of the best performers this year, and Mr. Market is starting to take notice.

In only two and a half months the price of gold has managed to jump nearly 14 percent, marking its best start to a year in decades. The miners logged even more impressive performances. Shares of the Market Vectors Gold Miners Index (NYSE:GDX) have gained 31 percent year-to-date, while its junior counterpart surged 44 percent. Silver, often referred to as gold’s little brother, has also participated in the recent rally. Shares of the Global X Silver Miners ETF (NYSE:SIL) have increased 27 percent this year.

Last month, the SPDR Gold Trust (NYSE:GLD), which is the world’s largest gold exchange-traded fund, experienced its first month of inflows in more than a year. Inflows have remained strong in March, and could be reversing the massive outflow trend seen last year. In 2013, ETFs and similar products witnessed outflows of 880.8 tonnes, compared to inflows of 279.1 tonnes in the previous year, according to the World Gold Council.

The rebound is causing a few market participants to take a second look at precious metals. Despite cutting its price forecast on gold in December, UBS recently hiked its three-month outlook from $1,100 per ounce to $1,350 and believes gold prices may average $1,300 this year, up from a prior estimate of only $1,200.

“Gold has started to shed its stigma, if slowly,” UBS said in a recent research note. “Over the past thirteen months, gold was either the favorite asset to short or to ignore completely. Recent developments, however, suggest that this is no longer the case, and momentum is returning. We do like gold a good deal more than we did at the end of 2013, but many obstacles still abound.”

Analysts at Nomura Securities are also more optimistic on gold. In fact, the firm expects gold to sell for $1,460 per ounce next year. “Many of the variables that drive gold prices have already reset to an extent. ETF and COMEX positioning no longer appear to pose the same threat to prices as in 2013. Gold producers have delayed the next phase of growth projects as they work to protect balance sheets. Long-term demand support from Asian nominal income growth, an evolving post-QE macroeconomic environment and lower disinvestment potential move our gold equilibrium model to now expect price increases over the next three years.”

Investors shouldn’t be too surprised to see precious metals rallying this year. As history shows, heavy selling pressure eventually subsides in financial markets. Since the 1970s, the price of gold has experienced 12 pullbacks of more than 20 percent, according to the World Gold Council. On average, each pullback lasted for 18 months, with the gold price falling 36 percent. The longest decline lasted 43 months. Between gold’s record high made in September 2011 and its potential double bottom in December, gold logged a 37 percent decline — similar to the average.

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Disclosure: Long EXK, HL, PHYS

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