What happened to gold prices in 2013?

Gold suffered greatly in 2013, with its value dropping by 28 percent, record outflows from gold exchange-traded funds, and a huge reduction in gold ETF holdings.

Many are wondering why gold prices took such a nosedive. So, why did it?

US Equities improved

Economic conditions in the US improved this year, the dollar strengthened, and as a result people regained confidence in US equities.

The dollar index increased and the Dow Jones Industrial Average and the S&P 500 made a comeback (reaching record five year highs).

As a consequence gold prices dropped to a low of $1,575/ounce, from its $1,600/ounce high.

Governments sold gold reserves

When the government of Cyprus was forced to sell its gold reserves people were worried that other fragile European economies would do the same thing. If that happened, gold prices would have made another nosedive.

The U.S. Federal stimulus program

Come May, the US Federal Reserve made an announcement that it could be cutting back on its monthly billion dollar stimulus program.

When news got around that the Fed could be cutting back their stimulus program, many investors who had kept gold purely because of fears of the volatility of the dollar started pulling out.

What will happen to gold prices in 2014

So what can we expect in the year ahead? Below are two basic and very simplified scenarios of what could happen:

If physical demand for gold remains weak and outflows from gold ETFs continue then gold will go down.

If, on the other hand, there is a surge in gold demand from emerging markets and there is unusual inflation then gold could go up.

In conclusion 2013 suggests that gold is no longer one of the “safest investment options”.