There are a few reasons for this slump: Panic over the Eurozone and its weakening currency, banks' need for cash, and year-end profit-taking have all taken their toll on gold this week.
Still, while gold prices may be stumbling right now, they are not headed for a long-term bear market - not even close. In fact, it's something our own gold and global resources specialist predicted months ago.
Money Morning Global Resources Specialist Peter Krauth said as far back as August that gold prices were due for a pull-back, so this minor blip isn't surprising - and it definitely isn't permanent.
"This is something I saw coming," said Krauth. "Back in late August, as gold was pushing $1,900, I told my subscribers it was due to pull back, and likely to trade in a range between $1,600 and $1,800, and that's exactly what we've seen so far. We could see a bit more weakness, but I think we're much closer to a bottom at this point."
A Weak Euro and the Scramble for Cash One of the biggest factors contributing to lower gold prices is the Eurozone and its increasingly weak currency. The euro fell Wednesday to $1.2998 against the dollar, its lowest level since January. That forced many traders into the dollar.
"As investors flee the euro, the "risk off' trade means they're falling back on the U.S. dollar," said Krauth. "A higher U.S. dollar, in turn, means lower gold because gold is priced in U.S. dollars."
Krauth said Europe's economic turmoil has forced the region's banks to hunt for more cash, which has led to more gold leasing transactions, further pressuring the precious metal's price.
"European commercial banks are desperate for cash," said Krauth. "They could well be "borrowing' central bank or other sourced gold to lend out simply to raise cash temporarily. Interestingly, gold lease rates just spiked back up on Dec. 7, the very same day we started that recent bout of gold price weakness."
Investors' year-end scramble to get their hands on more cash also has triggered massive selling. After poor portfolio performance this year, investors and fund managers wanted to take profits and beef up cash holdings, while others needed cash to make margin calls.
According to a recent Reuters asset allocation poll, global portfolio managers held more cash in November than at any time during at least the last seven years.
"[S]ome macro hedge funds are liquidating gold holdings and taking profits in a difficult year," HSBC Holdings PLC (NYSE ADR: HBC) analyst James Steel wrote in a note. "As trading volume typically drops toward year-end, we expect increasingly volatile price swings."
Other factors weighing on gold include the U.S. Federal Reserve's lack of commitment to help the weak U.S. economy and the fallout of the MF Global Holdings (NYSE: MF) bankruptcy.
"The bankruptcy led to the liquidation of many gold futures contracts where positions needed to be unwound," said Krauth.
But as Krauth said, this price tumble does not seal the deal for a long-term gold bear market.
Where Gold Prices Are Headed Gold has soared 175% since its price rally begin in 2009, and is still up 88% despite this year's price volatility and recent dip.
Krauth maintains his outlook that it will soar well over $2,000 an ounce next year -- and keep going.
"I believe gold prices will eclipse $2,200 an ounce next year, and shoot beyond even $5,000 an ounce after that," said Krauth.
That means more buying opportunities as prices pull back temporarily.
"If you are a commodities investor, there will be some great opportunities over the next couple of months to accumulate again if you're looking further ahead," Ole Hansen, senior manager at Saxo Bank, told Reuters. "The super-cycle is nowhere near dead, but right now, it is a question of getting exposure down and coming back in two weeks and seeing where we are."
Bespoke Investment Group tracked gold's previous slips below the 200-day moving average, and found it more often turned around to higher prices.
"While gold saw negative returns in the three, six, and twelve months following the end of its 1980 and 1988 streaks, following the four remaining streaks the close below the 200-DMA turned out to be a pause that refreshed for gold," Bespoke wrote in a report released Wednesday.
Krauth's gold-related investment picks for 2012 include Alamos Gold Inc. (PINK: AGIGF), Eldorado Gold Corp. (NYSE: EGO), and The Tocqueville Gold Fund (MUTF: TGLDX).
We've detailed more gold profit plays in our Private Briefing service. Click here to access those reports.
News and Related Story Links:
- Money Morning:
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- The Wall Street Journal:
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- Commodity Online:
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