8 Commodity Predictions For The Rest Of 2014

May 15, 2014

In the middle of the pack in terms of performance this year has been precious metals such as palladium and gold. But they've risen for different reasons.

Gold is, of course, seen as a monetary metal. The yellow metal plummeted 29 percent last year as the Fed began orchestrating the end of its ultra-loose monetary policies put in place since the 2008 financial meltdown. This year, prices have rebounded on hopes that the end of the Fed's quantitative easing (QE) has already been factored into prices.

It remains to be seen whether gold is merely consolidating before another big decline or attempting to bottom out and rally from here. So far, price action has been encouraging for bulls. Stock markets have hit record highs, economic data has improved and the Fed has steadily pared back its monthly bond purchases throughout the year, yet gold has hung in there.

Bull Case: Though quantitative easing may end this year, the Fed's monetary policies remain loose by any measure, a supportive factor for gold. Furthermore, the European Central Bank has indicated it could begin its own QE program as soon as next month. Easy monetary conditions, particularly at a time when the unemployment rate is coming down, is a recipe for inflation. If inflation indeed accelerates from here, gold will surely surge to much loftier levels.

Bear Case: The Fed will continue to taper QE, and by early next year, the central bank will begin to raise interest rates. Meanwhile, inflation remains low, and below the Fed's 2 percent target. Those are ideal conditions for risky assets such as stocks, but bearish for safe havens such as gold. Prices are merely consolidating before they begin falling again, as analysts such as Goldman Sachs predict.

Prediction: The bottom is in for gold. Prices will continue to consolidate in 2014 before rising in the coming years. The highly liquid SPDR Gold Trust (GLD | A-100) provides investors with great exposure to gold bullion, while something like the Market Vectors Gold Miners ETF (GDX | B-56) offers riskier exposure to gold mining companies.

Gold (YTD)

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