Gold bullion (NYSEARCA:GLD) prices ended the year down about 28%—the biggest annual drop in more than 30 years.
Gold bullion prices experienced an unprecedented run-up after the tragic events of September 11, 2001 and soared higher in 2008 as the global economy teetered on the brink of a recession. Investors’ justifiable fears of economic turmoil and inflation sent them running to gold bullion and gold mining stocks to hedge against this economic uncertainty. Between September 2001 and September 2011, gold prices soared more than 560%.
But since then, gold prices have lost their lustre. And in June of this year, the precious metal hit a three-year low of $1,179 an ounce after the Federal Reserve hinted it would begin to taper its generous $85.0-billion-per-month quantitative easing policy. Investors took this as a sign that the U.S. economy was on solid footing.
Gold bullion prices remained weak near the end of the year after the Federal Reserve announced on December 18 that it would begin to reduce its monthly bond buying program to $75.0 billion a month starting in January. Gold bullion ended the year at $1,202.
2013 will be remembered as the year when (misguided) economic optimism helped lift the Dow Jones Industrial Average by 26%, the S&P 500 by almost 30%, and the NASDAQ by 34%. In 2013, that same optimism also shaved off half of the value of gold mining stocks.
But it could get worse for gold bullion and gold mining stocks in 2014. After all, gold has lost significant value and doesn’t provide a dividend. On top of that, some equities have been providing investors with really solid double-digit gains and dividend growth.
This, coupled with a so-called improving economy, has many gold bugs predicting a weak year for gold bullion prices. Some expect gold prices to trip below $1,000 in 2014, while others predict it will hover near $1,250. Not everyone is so pessimistic about gold bullion prices; gold enthusiast Eric Sprott predicts gold bullion prices will hit $2,400 by this summer. (Source: Keith, D., “Q&A: Eric Sprott on gold and why it’s heading to $2,400 in a year,” The Globe and Mail, August 15, 2013.)
Whether gold bullion prices will explode, go sideways, or give up more ground in 2014, there are a number of different strategies investors can take when it comes to gold mining stocks.
For example, a drop in the price of gold to below $1,100 per ounce could hurt more highly leveraged gold mining companies, such as Barrick Gold Corporation (NYSE:ABX), Detour Gold Corporation (TSX:DGC), and Newmont Mining Corporation (NYSE:NEM).
When it comes to gold mining stocks, look for those companies with a strong balance sheet (cash), large deposits, and production costs near or below $1,000 per ounce. Gold mining stocks that fit that bill include B2Gold Corp. (NYSE:BTG), Eldorado Gold Corporation (NYSE:EGO), and Goldcorp Inc. (NYSE:GG).
In a year when few expect gold prices to soar and many mining stocks are struggling to survive, you may also want to consider looking for junior gold mining stocks with proven resources to be valuable at current prices, such as Midas Gold Inc. (TSX:MAX) and Gold Reserve Inc. (TSXV:GRZ).
While 2014 may not be the year gold bullion regains all of its shine, it might be remembered as the year when astute investors got in ahead of the rush.
This article is brought to you courtesy of John Whitefoot from the Daily Gains Letter.