Price of Gold in 2013: Is This Year's $475 Plunge Just the Beginning?

Coming into 2013, investors in gold had enjoyed 12 straight years of gains, giving them high expectations for the future of the yellow metal. Yet the price of gold in 2013 plunged by more than 25%, losing $475 per ounce and remaining just barely above the $1,200 mark at its most recent reading. In hindsight, it's important to understand what precipitated the big decline in the price of gold in 2013 and to figure out what investors can learn from their mistaken optimism.


Image source: Wikimedia Commons.

What caused gold prices to decline in 2013?
In looking at what happened to the price of gold in 2013, it's easy to forget that the gold market had actually been setting the stage for a substantial pullback for several years. Gold hit all-time record highs around $1,900 per ounce in August 2011 before a substantial correction throughout the remainder of the year. Subsequent moves higher in 2012 fell short of that $1,900 high-water mark, leaving those who use various technical-analysis methods somewhat nervous about the yellow metal's prospects entering the year.

GLD Total Return Price Chart

Gold Return data by YCharts.

But the real problems for gold became evident to mainstream investors in April, when gold prices plunged $200 in a two-day span to their lowest levels in two years. With the banking crisis in Cyprus going on at the time, gold investors feared that the island nation's central bank would have to liquidate its gold reserves in order to shore up its financial system. That change in sentiment reversed the conventional thinking that central-bank purchases would continue to support the price of gold through 2013.

From there, further gold-price declines stemmed from increasing worries about an imminent shift in the Federal Reserve's monetary policy. For years, one of the underpinnings of the bull-market move in gold had been the Fed's aggressive moves to keep interest rates low. Yet in June, the Fed first signaled that it would consider pulling back on its latest round of quantitative easing, and even the possibility of such a move sent gold still lower, touching the $1,200 level.

An investor exodus?
After the initial drop in prices, two things happened. One was that gold miners' shares got hit even harder, as the decline in the price of gold had an even more dramatic impact on their profit margins. Many small producers suddenly found themselves unprofitable, and even major players Newmont Mining (NYSE: NEM  ) and Goldcorp (NYSE: GG  ) took big hits. Specifically, the fall in gold prices led to major decisions to mothball even some of the most promising gold exploration projects. Barrick Gold (NYSE: ABX  ) decided to suspend its exploration at its Pascua-Lama site in Chile, threatening not only its own profits but also those of silver-streamer Silver Wheaton (NYSE: SLW  ) , which had taken a stake in the potential silver production from the mine. In other cases, loss of economic viability made decisions from other producers to suspend exploration efforts easier to make but more painful for shareholders.

Second, investors started pulling out of once-popular ways to play the gold market. SPDR Gold (NYSEMKT: GLD  ) , an ETF that allows investors to buy shares that aim to track the price of gold, saw a dramatic drop in the number of shares outstanding. As investors sold off their ETF holdings, market specialists redeemed blocks of ETF shares in exchange for bullion, reducing the amount of gold that SPDR Gold owned. Coming into 2013, SPDR Gold had more than 43 million ounces of gold in its reserves, with a value of $72 billion. Now, the ETF holds about 26 million ounces of gold, down 40% from its year-end 2012 levels, and the drop in gold prices has made that bullion worth just $31 billion.

What's ahead for gold?
Looking to 2014, gold prices could easily remain under pressure for some time. With the Fed's decision earlier this week to start reducing its bond-buying activity, interest rates could continue to move higher in the coming months, putting more pressure on gold investors to liquidate their holdings in favor of income-producing assets. If the moves in the price of gold in 2013 are any indication, sentiment has never been weaker, and whether that will produce a contrarian rally in 2014 or a continuation of the downward trend remains to be seen.

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Read/Post Comments (8) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 21, 2013, at 4:12 PM, duuude1 wrote:

    "Is This Year's $475 Plunge Just the Beginning?"

    Yes just the beginning - of a volatile and decade long deflation in gold price.

    Stick with diversified stocks.

  • Report this Comment On December 21, 2013, at 7:08 PM, BimmyBoris wrote:

    On average, over time, gold prices go one way. UP. How low will this dip take it? Who knows? IAG is trading at 40% of tangible book. It is beginning to look like a takeover candidate. Good luck.

  • Report this Comment On December 21, 2013, at 7:44 PM, duuude1 wrote:

    Hey BimmyBoris,

    This chart shows that gold is essentially flat through most of history, with several notable bubbles which deflate promptly back to the baseline. You can see that we still have a looooong way to get back down to that baseline.

    http://www.macrotrends.org/1333/gold-and-silver-prices-100-y...

    Good Luck - and get back into stocks!

    Duuude1

  • Report this Comment On December 21, 2013, at 7:46 PM, duuude1 wrote:

    Hey BimmyBoris,

    This chart shows that gold is essentially flat through most of history, with several notable bubbles which deflate promptly back to the baseline. You can see that we still have a looooong way to get back down to that baseline.

    http://www.macrotrends.org/1333/gold-and-silver-prices-100-y...

    Duuude1

  • Report this Comment On December 22, 2013, at 4:21 AM, chiller wrote:

    dud1

    You're 3 out of 4 comments speaks volumes. Anyone who can read knows this artificial stock run was fully architected and contrived from QE3. And it's no secret big banks manipulate PM prices with their criminal naked shorts. But no one here wants to talk about the truth because the truth won't make you dirtbags any money. And that's all your pathetic lives are fully encapsulated in is greed.

    With such a naive look on financials...it's no wonder no one comes here to post...because we all know it's a bunch of hog wash. I, on the other hand could not resist having a shot at such an easy target.

  • Report this Comment On December 22, 2013, at 5:53 AM, BurtsDog wrote:

    Duuude1,

    You are assuming the big spike in 2011 is reminiscent of the big spike in 1980... but what if we are seeing a spike more akin to the spike of 1974-1975 (a wicked sell off followed by an unbelievable moon shot rally)?

    No one knows. No one can ever know. And you need to play your investments based on the knowledge that in mind. The moment you think you know is usually the moment you find yourself on the wrong side of the trade. I'm not saying gold cannot go much lower. And I'm not saying there will be a moonshot rally afterward. I'm just saying... don't be overly confident in your ability to guess the future of some market.

  • Report this Comment On December 22, 2013, at 8:23 AM, duuude1 wrote:

    Hey BurtsDog,

    You said:

    "No one knows. No one can ever know."

    In the short term I agree with you 110%. That's why I never trade in and out of positions.

    "And you need to play your investments..."

    I don't like to "play" my investments - they're too important for me to "play" with. I don't want to be the sucker who walks into a casino to play a game. I want to be the house. The house doesn't know short term who will win or lose, but knows that long term the odds are stacked in the house's favor. I want my investment odds stacked in my favor.

    When you look at long periods of time, this is what we know: the long-term returns, even with volatility, are by far best for stocks, followed by bonds, then treasuries, then real estate, then precious metals.

    Let's look even more long term on gold - here's a great chart:

    http://i.imgur.com/PVLmuPg.png

    By the way, BurtsDog, what was that "unbelievable moon shot rally" followed by? Decades of what...?

    Duuude1

  • Report this Comment On December 24, 2013, at 2:55 PM, ffbj wrote:

    I took a small position in Nem and Auq recently as a hedge, having been a long time ani-gold person, some friends were a bit shocked.

    So in analysing my own behavior: I just thought that gold was a value after being beaten down. I chose Nem since they pay a dividend and Auq as my speculative play.

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