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Gold Investing Loses Luster As New Lows Expected For Prices

Trang Ho
Investors Business Daily
March 15, 2012

Investing in gold lost its luster this week.

The dollar strengthened. Interest rates rose to a four-month high. An upbeat Federal Reserve report eroded expectations of more quantitative easing. And investor appetite grew for riskier assets like stocks.

SPDR Gold Trust fell 2.4% this week going into Friday as it kissed a two-month low. In the futures market, the price of gold per ounce fell 2.6% this week to $1,644.25 an ounce in London.

PowerShares DB US Dollar Index Bullish — tracking the greenback against a basket of foreign currencies — has ticked up 0.17% and hit a two-month high this week.

IShares Barclays 7-10 Year Treasury Bond Fund skidded 1.92% to a four-month low of 102.66. Yields on the benchmark climbed 25 basis points to 2.29%, their highest in nearly five months. Prices and yields move in opposite directions.

There's nothing more attractive than the U.S. dollar and U.S. stocks right now as "the Fed's tone has changed dramatically since their late January monetary policy meeting," wrote Kathy Lien, director of currency research at GFT.

"At the same time, the credit quality of Europe has deteriorated while the countries down under are beginning to suffer from slower Chinese growth," she added. "In fact, the U.S. is the only place in the world where we have seen consistent improvements in key economic reports such as non-farm payrolls and retail sales."

Buy On The Dip?

A strong economic outlook and rising interest rates decrease investor appetite for safe-haven assets that generate no yield. The major dilemma after a sell-off is whether investors should snatch up shares for cheap or jump out of the way?

GLD fell below its 200-day moving average on Tuesday. It rallied Thursday did not regain the line. Gold has usually found support at its 200-day line for the past three years. A break below this key line could lead to even more selling as stop-losses are triggered and brokers make margin calls.

Tom McClellan, editor of the McClellan Market Report, expects gold to fall back down to its December low or even lower.The three days it rose last week merely amounted to a countertrend rally within a new downtrend, he says.

Terry Sacka, chief strategist at Cornerstone Asset Metals in Jupiter, Fla., believes gold futures could fall to $1,500 an ounce and then rebound back to $2,000 an ounce or higher.

"All these dips (prompt) China and others into purchasing the real physical (metal) while avoiding the paper," he said. "Americans shun the idea of storing up gold and silver as a means to grow wealth, but the foreigners on the other hand (are thinking) buy, buy, buy."

Despite what the Fed says, the economy is actually weakening, contends Peter Schiff, president of Euro Pacific Capital, and a gold bull.

"We're spending ourselves into a deeper economic hole. The trade deficit is getting bigger," Schiff said. The stock market is going up because, he says, the Fed is printing money, which fans inflation. "As people figure this out, they'll buy back gold," Schiff said.

The U.S. current account deficit grew to $124.1 billion in the fourth quarter from $107.6 billion in the third quarter.