GOLD PRICE ESTIMATE FOR 2014
In order to estimate the gold price with the Gold Regression Model, an estimate of the four underlying factors must be made. Most factors, such as the size of the Monetary Base or exchange rates are the outcome of political decisions, usually only loosely connected to the economy or society as a whole. This makes financial forecasting in the era of “the new normal” more an art than a science.
Predictions for the 2014 monetary environment
In order to make predictions for the future, it is important to understand the past. In this post, I revisit the Gold Market of 2013. The biggest impact on the gold price will be the continues expansion of the monetary base, in the US and Japan. In the FOMC December meeting, Ben Bernanke turned the tap slightly, reducing the creation of new money from $85B to $75B. This slight “disturbance in the force” bumped up the 10 Year US Treasury rate to 3% and wreaked havoc on the new home sales. Considering the FED’s new chief Janet Yellen to be a monetary dove, I expect that monetary conditions remain loose throughout 2014, with a smaller amount being printed, but still running strong throughout the year, ending with $45B in December 2014.
Japan will also continue it’s crazy Abenomics, adding 5,400B Yen ($52B) to their monetary base every single month. The Yen will gradually lose value against other currencies, which drives up inflation from higher import prices, mainly oil. Halfway the year, the program will be slashed in half, to 2700B Yen per month, where it will stay until the end of 2014. The ECB stays reluctant to join their American and Japanese cousins, since its political base is strongly divided between the credit starving South and inflation wary North.
The US economy continues to improve at a slow pace, fueled by the loose monetary condition the FED creates. Japan tries to replicate this strategy, but since the yen is not the world reserve currency, there will not be enough demand for those newly printed Yen’s, leading to a continues devaluation of the Yen. On the other hand, the Euro Zone’s political indecisiveness and their inability to expand the MB leads to a stronger Euro. The cooling of the Chinese economy will stabilize the Chinese Yuan, ending it’s controlled ascend. Finally the mangled Indian Rupee will continue its path of decline, but at a slower pace. The currency index containing the 4 GDP weighted currencies will rise nearly 2%, indicating a stronger USD.
Inflation in the US will rise, fueled by rising energy, healthcare and housing costs. However, inflation will not rise to a degree that would force the FED to halt QE. Since the FED promised to keep short term interest rates near zero until at least 2015, the 1Y US treasury rate will remain near 0.25%. Higher inflation with low interest rates will suppress real interest rates even further in negative territory.
Finally, the yield spread will continue to narrow throughout 2014, reflecting better economic conditions and increasing risk apatite from investors. The Yield spread between HYG and TLT has been decreasing with around 0.50% annually since 2010, a trend that could continue in 2014.
Technical Analysis estimate
In 2013 the Gold Price set a series of lower tops, all perfectly aligned with the descending resistance line. In January 2014, the Silver Price broke through the resistance line and in February through the 100 Days Moving Average. Both trends indicate that the trend of lower gold prices is finally broken. This leaves room for a recovery to the previous tops, of 1350 and 1425.
2014 ESTIMATED GOLD PRICE
To conclude, 2014 can shine for gold investors, after a nearly continues decline starting April 2011. It is unclear with how much the FED is going to taper their Quantitative Easing program. Fears of tapering caused a collapse in the gold prices in mid 2013, and there is some room for recovery, now that the money printing program seems here to stay in a reduced form.