Gold Starts 2014 With a Bang, Surprising Many

Gold is off to a surprisingly strong start to 2014, to the dismay of many gold bears. After the precious metal had its first losing year in more than a decade in 2013, it is up more than 9% this year as of March 25th to $1,313.50.

Gold performed exceptionally poorly in in 2013, losing 27% of its value in a single year, as investors flooded into the stock market in droves, pushing the S&P 500 Index past its all-time high. But many are betting on gold’s continued rise in 2014 as stocks are looking increasingly expensive.

Some observers have suggested that the crisis in Ukraine has prompted speculative buying of gold bullion, but data from Google Trends suggests a weak correlation. Trading volumes in gold-backed ETFs has also been steady since the beginning of the year.

The more likely scenario is that gold is returning to growth after a particularly tough year. Strong consumer demand in emerging markets may also be playing a role. Demand for gold coins and gold bars has increased by 35% and 37% in India and China, respectively in the 12 months to September 2013, according to a CBMint analysis of data produced by the World Gold Council.

Conventional wisdom suggests that gold investments tend to do best when the stock market is falling. But even as stocks continue to break records for all-time highs, gold bullion remains resilient. If you compare gold to stocks over longer periods, the illustrious metal begins to look even more attractive.

Consider the value of $1 invested in Gold Bullion and another dollar invested in the stock market, each at the end of the year 2000.

Value of $1.00 Invested in:Gold BullionS&P 500

Source: Kitco, Yahoo! Finance

Had you held a physical gold bullion investment since 2000, $4.79 today for every dollar invested at the turn of the millenium. The same $1 invested in the S&P 500 in the year 2000 would only be worth $1.83 today, and that’s assuming you reinvested all the dividends!

In summary, gold has proven to be a winning investment while its owners have endured substantially less gut-wrenching volatility, compared to owners of stocks over the past 15 years. In addition, much of this stellar performance occurred against a backdrop of historically low inflation. If inflation were to pick up again, as many smart people believe it will, this could spark yet another long bull run for gold.