What's Next for Gold?

Unexpectedly, though, the dream of $1,500-per-ounce gold has been unfulfilled.

Just as the desert blooms when it rains, gold is expected to blossom during times of economic uncertainty and unrest. Unexpectedly, though, the dream of $1,500-per-ounce gold has been unfulfilled.

In fact, year-to-date, the precious yellow metal failed to break past the 2008 high of $1,014/oz and lost some 15 percent since the middle of February.

Gold's decline comes amidst an avalanche of news reports with the propensity to send gold prices to all-time highs. For example, the Federal Reserve announced to devalue the U.S. dollar by purchasing $1.2 trillion worth of its own debt, which in turn moved China, the biggest foreign holder of U.S. Treasuries, to suggest an alternate world currency.

After a 54 percent drop in U.S. equities over the past few months, investors simply felt that gold is the only safe haven. Due to the transition from equities into gold, the SPDR Gold Shares (GLD) ballooned into the second-biggest ETF on the globe, $31 billion strong.

Despite the most bullish news for gold in decades, however, prices have remained stagnant. What is going on?

The February 26th issue of the ETF Profit Strategy Newsletter made the following observation: "One lesson we should have learned in the recent past is that extreme investor optimism often foreshadows an end to rising prices. No doubt, precious metals will take on an important role as equity markets and currencies continue to lose value over the long-term. However, a look at historic gold prices reveals that most of the major gold price peaks (1975, 1980, 1987 and 2008) occurred in the first quarter."

In addition, the newsletter pointed to a non-confirmation between gold prices and the value of gold mining stocks. The Gold Miners ETF (GDX) trading 30 percent below its all-time highs while gold prices came with reach of their 2008 all-time highs earlier in February 2009. Such a non-confirmation often carries a negative connotation.

A shift in the perception of profit potential, though, was highlighted as the major reason for falling gold prices: "As investors start to fall in love with stocks again, money will shift away from gold and silver," according to the newsletter.

Such a change in investor's perception about the risk/reward potential of gold would likely result in falling gold and rising equity prices. As it turns out, gold prices topped mid-February while equity prices bottomed in March and have rallied over 25 percent since. A detailed forecast for gold and U.S. stocks is available in the ETF Profit Strategy Newsletter.

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