Will 2014 spell the collapse of gold?

After more than a decade of gleefully watching the price of their shiny yellow investment climb by more than 500 per cent, gold investors have been humbled.

Gold’s price has dropped by almost 30 per cent over the past year to around US$1,200 per ounce, its biggest drop since 1981, making it one of the worst performing assets over the past 12 months.

With the exception of some very bullish investors, few are expecting a dramatic turnaround in 2014.

The good news for gold investors: It’s not expected to fall much further either, according to some experts.

“We do not foresee another rout for gold in the cards for 2014-15,” TD Bank economist Sonya Gulati said in a recent report on gold.

The bank expects the average gold price to be $1,175 this year and tick up slightly to $1,280 in 2015, which is line with other economist forecasts.

“The bull market for gold is firmly in the rear-view mirror,” Gulati writes.

Some argue gold’s time was up after a 10-year run that took it briefly above $1,900 per ounce in 2011. Demand for the metal as a store of value has since waned amid low inflation and a rebound in equity markets.

Gulati notes there were a few factors that caused gold to collapse in recent months, starting with the Cyprus bailout last spring. Speculation that the country could begin selling gold to finance its debt sent the metal into a downward spiral to around $1,400, from $1,670 at the start of the year, to its lowest level in more than two years.

Investors then began to furiously pull their money out of gold exchange-traded funds (ETFs), the same investment vehicle that had helped to drive investment in gold in recent years.

The World Gold Council says gold investment demand fell by more than 50 per cent in the third quarter of last year, “due to substantial outflows from ETFs.”

Consumer demand for gold coins and jewelry offset some of those ETF outflows, as lower prices drove demand in countries such as India and China, the Council said in its latest report.

That said, it was hardly enough to help the gold price recover.

While some gold bulls are predicting the metal to double in value this year, believing the U.S. economy isn’t as healthy as investors are being led to believe, others forecast investor interest in the metal will continue to be muted.

The strengthening U.S. dollar and a pullback in economic stimulus in the U.S. and the rally in equities is taking the shine off gold.

“From a portfolio perspective, there is still room for gold to help hedge against nasty, unexpected surprises,” Gulati concludes. “However, investors will likely see a smaller return on the precious metal than has been the case over the past decade.”