Gold has been the best performing asset class this year, according to investment firm Coutts, rallying 10 percent year to date, but some analysts have warned investors not to get too comfortable.
Dominic Schnider, head of non-traditional asset classes at UBS, told CNBC Asia’s”Squawk Box” on Wednesday that the 2014 rally was set to end in tears, and gold and silver would see double-digit declines this year.
“Some of the buying we have seen recently is not really driven by fundamentals, but is more momentum driven. That should run out of steam – so we’ll see double digit declines on the precious metals this year,” said Schnider, who is a long-term gold bear.
Gold traded near a four month high, hit the previous day, in Asian trade on Wednesday, opening at over $1,340 an ounce. Worries over the strength of the U.S. recovery and political turmoil in the Ukraine revived appetite for the safe haven trade.
Silver prices, meanwhile, which are strongly correlated to the gold price, has rallied over 14 percent since the start of February to $21.79 an ounce.
The precious metals’ performance this year a far cry from the pain of last year, when the Federal Reserve induced tapering panic send the yellow metal plunging 34 percent from April to June. The Fed’s quantitative easing program and ultra-low interest rate policy has been one of the key drivers of gold strength in recent years.
But, despite the precious metal’s apparent turnaround this year, UBS’s Schnider told CNBC gold’s fortunes were set to turn ugly once again, as investors turn more positive on the global economy.
Schnider told CNBC he saw gold prices falling to $1,050 per ounce on a 12 month view, while silver prices trading at around $18 by year end.
“Think about it, we are in a risk on environment probably going into the second quarter of this year, rates [on 10-year Treasurys] are going to rise faster than most people expect and the dollar’s going to strengthen [and] we are looking at an environment where equities continue to do well,” he said.
“So if you consider that there is a good chance that some of the buying which was mostly driven by futures will actually revert, and then you are going to see Exchange Traded Funds (ETF) outflows,” he added.
Last week, hedge funds plowed into gold and crude oil as prices rallied last week. Data released Friday showed the bullish money wagered by commodity speculators was driven to the highest level since 2011, Reuters reported. Gold accounted for $2.9 billion, or 21 percent, of the weekly increase of $13.5 billion in managed money net longs.
Gold bulls, however, say there is still a plethora of positive drivers that should help gold’s bullish run continue through the rest of the year.
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One bullish factor is growing demand from China, which is set to surpass India as gold’s largest importer. The China Gold Association revealed last week a record level of Chinese gold consumption in 2013, which was estimated to have risen 41 percent to 1,176 metric tons from the previous year.
“We do believe the underlying physical market is making adjustments as there has been a moderation in primary production and a collapse in recycling,” said David Lennox, resources analyst at Sydney-based trading firm Fat Prophets, who sees gold ending the year between $1,350 and $1,400 an ounce.
“At the same time, there has been an uplift in jewelry demand and demand from sovereign governments, because of the uncertainty in paper assets. Furthermore, investors are more comfortable with the idea of Fed tapering, which will be good for gold,” he added.
According to Lennox, the U.S. government will soon turn its attention back to addressing its budget deficit again, inevitably putting pressure on the U.S. dollar and boosting gold as a result.
© 2014 CNBC LLC. All Rights Reserved. Katie Holliday