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Gold Bugs Catch a Break

Gold bars at Gold Investments Ltd. in London, on Jan. 15

Photograph by Chris Ratcliffe/Bloomberg

Gold bars at Gold Investments Ltd. in London, on Jan. 15

It’s easy to see the investing wisdom in Warren Buffett’s admonition to “be fearful when others are greedy, and be greedy when others are fearful.” Acting on that advice is supremely difficult. Still, investors who gambled on gold at the end of an especially frightful 2013—which saw a 28 percent price drop for the precious metal, compared to a positive 29.7 percent return for the Dow Jones Industrial Average—have significant gains to show for it.

Gold bullion has climbed 7.2 percent this year as stocks have dropped 4 percent. There’s been an even more dramatic reversal among gold mining securities, which tend to amplify the gains and losses of the underlying metal. The Market Vectors Gold Miners ETF, following a brutal 54.5 percent decline in 2013, is up 19.2 percent this year.

Jeffrey Gundlach, founder of DoubleLine Capital, an investment firm overseeing $49 billion, said in his 2014 forecast in January that gold and gold miners were ready to rebound. “Sentiment is black as night on gold so I’m actually long on some gold miners,” he said. Gundlach predicted bullion would rise to $1,350 per ounce, an increase of 12.4 percent from its Dec. 31 price. The median forecast for the fourth quarter of 2014, according to a Bloomberg survey of analysts, is $1,225.

Gold’s rise in the last five weeks has caught many analysts by surprise. Goldman Sachs (GS)’s Jeffrey Currie, the bank’s head of commodities research, called the metal a “slam dunk” sell for 2014 in October, after the shutdown of the federal government ended.

Following a big decline in 2013, the gold mining industry could be ripe for more mergers and acquisitions activity. The $10.1 billion of such deals in 2013 was the lowest total since 2004, Bloomberg News reported on Jan. 4. The 10 largest producers are expected to generate free cash flow of $4.17 billion this year, up from negative $1.74 billion in 2013, according to Bloomberg data. The two largest mining companies, Barrick Gold (ABX) and Goldcorp (GG) , report their quarterly earnings on Feb. 13.

Gold bullion gained again in trading today, as Janet Yellen delivered her first testimony to Congress as chair of the Federal Reserve. Yellen said she expected “a great deal of continuity” with the monetary policies of her predecessor, Ben Bernanke. The Fed is now buying $65 billion in bonds each month to stimulate the economy, down $20 billion from its 2013 pace. Many gold bugs predict inflation will follow the central bank’s accumulation of a $4.1 trillion balance sheet.

Nick Summers covers Wall Street and finance for Bloomberg Businessweek. Twitter: @nicksummers.

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