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How Everyone Missed Gold's Big 2013 Plunge

Here’s a Bloomberg News headline that no one saw coming: “Gold Bulls Retrench as Price Drops Most in 32 Years.” One year ago, analysts surveyed by Bloomberg had a median price target of $1,815 an ounce for the end of 2013. Actual year-end price: around $1,200.

That is one huge miss. Not only did gold futures fall in 2013, but they fell 29 percent, the first yearly decline since 2000 and the biggest since 1981. Why were the forecasts so wrong? Mostly because gold prices are highly sensitive to the outlook for growth and inflation and the inscrutable moods of speculators. Guess wrong on those factors and you can be way off.

A year ago, a post on the Wall Street Journal‘s website cited analysts at BNP Paribas predicting gold would average $1,865 an ounce in 2013. The analysts, as the blog post noted, “expect new all-time highs to be hit on the back of further monetary easing, less tail risk related to a breakup of the euro zone and ongoing support from physical demand.”

One of the few analysts who got it right was Steen Jakobsen, chief economist at Denmark’s Saxo Bank, who said gold would fall to $1,200 an ounce. This wasn’t an actual forecast but one of the bank’s annual “outrageous predictions,” which are billed as “tail risks”—dramatic, low-probability possibilities.

What will gold do in 2014? The futures market is looking for its price to be flat in the coming year. Saxo doesn’t venture a guess on gold, but it offers this in its list of “outrageous predictions” for 2014: “U.S. deflation: coming to a town near you.” That would most likely be a big negative for gold, an inflation hedge.