Gold continues to grind lower as this is written, nearing $1280 an ounce on the spot market. Increasingly, the yellow metal looks like the poor cousin to the Dow Jones Industrial Average (INDEXDJX:.DJI) and the S&P 500 (INDEXSP:.INX) – the equity indices hit 16,000 and 1800 respectively today, setting new records.

Gold posts a negative return for the first time in 13 years

Gold has fallen from its lofty pedestal this year, giving up almost 24% while the S&P 500 (INDEXSP:.INX) gained the same percentage. Increasingly, it looks like investors have given up on gold, once the investment of refuge in a global crisis situation.

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Big ticket investors such as Soros and Paulson sold off or reduced positions earlier this year. If it’s any consolation to small investors, Paulson continues to maintain a position, albeit a smaller one compared to the size of his earlier investment.

What should investors now expect from gold?

Tapering to pressure gold next year

“We see little prospect of any tapering announcement this year, while the January revisiting of the debt ceiling debt will occupy markets, while Yellen takes up the reins of the Fed in February, suggesting that March will be the earliest possible date for a possible tapering announcement,” says analyst Edward L Morse in Citi’s 2014 Annual Market Outlook for Commodities. “We expect fevered tapering speculation will push prices towards $1,200/oz. in Q1 next year, before the physical market in the form of Chinese buying provides support,” says Morse.

Tepid inflation and red hot equities

‘Taper’ worry is not gold’s only woe, however. Low-key inflation prevailing over the past five years has blunted gold’s supposed hedge against rising prices, and Citi economists expect only a token uptick in inflation next year.

With equities roaring ahead, gold shows up in poor light, and it is no surprise that investors have dumped nearly 755t of gold held through ETFs. Physical gold is not the only casualty; “Net money manager long positions are now down by 97% compared levels at the end of 2012, and we expect this downward trend will largely continue through 2014, although short term reversal are expected in January as the US revisits debt ceiling negotiations,” says the analysts’ team at Citi.

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The yellow metal is therefore struggling in a low inflation/high opportunity environment.

China: Gold’s white knight

Gold would have done much worse this year were it not for bargain-hunting by the Chinese, who stepped in to take advantage of the low prices and stocked up on the metal. The country imported 1,113 t this year, almost 38% of global mine output. Citi expects that China will continue to act like a bulwark to gold prices through next year.

Gold will certainly need that, because India, another major gold importer, has imposed restrictions and duties on the inflow of gold in order to control its fiscal and current account deficits. “We believe that Indian government restrictions will hamper official gold demand through 2014,” says Citi.

Banks go slow on the bling

Even central banks the world over have cut back on gold purchases, not wanting to catch a falling knife given the steep fall in the metal’s price. The Citi analysts worry that tapering, and the resultant strength in the dollar, will provide the banks with further incentive to avoid gold and instead hold dollars/US treasuries through next year.

Compounding the above problems is increased gold supply hitting the market out of new mines coming on stream next year, and existing producers selling their output in order to keep mines running by covering at least the cash cost of production.

Here is Citi’s outlook for gold year-wise:

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