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What's Next for Gold Prices?

Rob Silverblatt

What to make of the recent decline

With gold prices falling, investors are struggling with the question of whether the decline is a temporary lapse in an ongoing bull market or a sign of more trouble to come.

In 2011, gold rose above $1,900 per ounce. As of Friday afternoon, it was trading at $1,575. In the last month alone, gold prices have slipped by 6.8 percent. Even with the recent dip, however, gold is still up 67 percent over the past five years.

Gold's recent decline has a number of root causes. For starters, investors are slowly regaining confidence in the stock market. Gold prices, by contrast, tend to rise when investors are feeling bearish about stocks.

[Read: Low Interest Rates Support Higher Gold Price.]

Meanwhile, gold investors have been concerned about how long the Federal Reserve's monetary policies will remain in place. The Fed's bond-buying efforts have kept interest rates near zero and helped fuel an explosion in gold prices. However, the prospect of an eventual tightening of monetary policy has created uncertainty in the market and has been partly responsible for the recent dip.

Adrian Day, CEO of Adrian Day Asset Management in Maryland, says he expects gold's struggles to be temporary. "The fundamentals of gold for the most part are still intact," he says. "Whether there's a slight pullback in bond buying by the Fed or not, all and all, one can be fairly certain that there won't be any significant tightening anytime soon."

Day also notes that if Congress fails to stave off sequestration, the stock market could take a hit. That, in turn, could boost gold prices as investors pull money out of stocks and put it into gold. "If the stock market comes to a hiccup at some point, and maybe it will if sequestration takes effect ... some of that money may flow back into gold," he says. "Basically, I'm pretty bullish [on gold]."

[Read: Are You Holding the Right Kind of Gold?]

Marty Leclerc, a portfolio manager at Barrack Yard Advisors in Pennsylvania, notes that because gold prices are tied to investor sentiment, it is difficult to accurately predict where prices will go in the coming months. "Gold really isn't dependent on long-term supply and demand metrics so much as sentiment," he says. "We [therefore] have a difficult time in knowing which way gold will go."

Although Leclerc sympathizes with gold's appeal to investors who are bearish about the stock market, he suggests that other hedges, such as agricultural investments, could be more appealing. However, for investors who are interested in gold, Leclerc recommends investing in mining companies rather than in gold bullion. "I think if you're interested in gold investments because you're worried about a dysfunctional political environment and geopolitical risks ... we would say look to agriculture first, but if you still want to have exposure to gold, we would say it's a no-brainer that you want to own gold stocks."

[Read Beyond Gold: New Ways to Invest in Precious Metals.]

Morningstar's Elizabeth Collins says although it is "hard to make short-term predictions" about gold prices, some of the best opportunities in the gold universe are currently coming from smaller mining companies. As examples of companies with room to grow, she cites Yamana Gold and Eldorado Gold.

Overall, although the long-term prospects for gold prices remain unclear, analysts caution against making too much out of the recent decline. "Even if the bull market [for gold] is still in place, it's not unusual for there to be a correction in price," Leclerc says.

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