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After a 12-Year Low, What's Going on with Gold?

Stocks in this article: BRD GG IAU PPP

NEW YORK (TheStreet) -- Will gold be a bull or a bear in 2014?

We have been watching gold prices fall since October of 2012, when the spot price was $1,793 per ounce. Gold prices had advanced every year from 2001 through 2012. During 2013, gold's price fell 28%. After tagging a low of $1,181.40 per ounce on New Year's Eve, the spot price of gold has risen to $1,253.40.

While many analysts are claiming that the price of gold has bottomed, others remain bearish. Despite gold's strong start during the first days of 2014, a number of analysts -- such as Jeffrey Currie at Goldman Sachs -- see gold prices falling lower. Currie expects gold to sink as far as $1,050 per ounce by the end of the year, more than a 15% drop.

On the other hand, at Germany's Commerzbank, analyst Eugen Weinberg sees the price of gold headed 12% higher this year. On Dec. 19, Mr. Weinberg explained that if gold's price could maintain a long-term bottom at above $1,220 per troy ounce, investor interest would likely increase. So far during 2014, gold has closed above $1,220 per ounce during every trading session on the Chicago Mercantile Exchange. Beyond that, on Jan. 20, Commerzbank reported that Friday, Jan. 17 brought the highest single-day inflow of gold to ETFs since October of 2012, at 7.4 tons.

As gold prices were falling, mining companies were scaling back their operations. This involved less expansion of existing facilities as well as reduced exploration. By September of 2013, exploration had been cut to half the level in 2012. Obviously, this will result in reduced availability of the metal when demand improves, probably driving prices higher at a faster pace.

During the weak gold market of 2013, demand for physical gold was maintained by China and India. For the first three quarters of 2013, those two nations purchased over 1,500 tons of gold, with 821 tons purchased by Chinese investors and buyers alone. As demand increases in the West, China and India are not likely to lose their taste for the yellow metal.

The Chinese government itself is increasing its gold reserves. A good deal of commentary has focused on the notion that as part of its effort to have the dollar replaced as the world's reserve currency, China is stocking up on gold.

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