Is Gold in Trouble?

Goldbugs are nervous, and rightly so. Their beloved metal—the “currency of last resort”—has been acting more like a basket case than a bastion of safety. During the second quarter, gold fell in value right alongside global stocks (AWCI) and the euro (FXE). What’s going on?

Even commodities permabull Jim Rogers admitted to the Business Insider that gold could fall 40 to 50% in value if India ceased gold imports or if Europeans began liquidating their holdings.

The early warning signs behind gold’s fall beneath key trading levels have been months in the making. Gold flirted with falling 20% from its peak multiple times during the second quarter and has already forfeited the gains from its strong start earlier in the year.

In the three months up through the May 24 market close, the SPDR Gold Shares (GLD) lost 12.09% in value. From a technical perspective, GLD is trading below both its 50 ($158.57) and 200 ($164.63) simple day moving averages, which means the trend is still down.

The ETFS Physical Precious Metals Basket Shares (GLTR), which is a broader measure of the precious metals group and includes gold, silver, platinum and palladium in one package, was down 15.76% over the same period.

“While gold is a safe haven in general, this is not true during a credit crisis,” said Daryl Montgomery, author of Inflation Investing: a Guide for the 2010s. “When the financial system is severely stressed, it is difficult to sell paper assets. Banks and hedge funds instead lease gold from central banks for a small sum and then sell it on the open market. This provides them with some quick cash that they desperately need and is what causes gold to drop when it seems like it should be going up.”

Could 2012 turn out to be the first time in 11 long years that gold has a loss?

For more than a decade, gold performed well despite the 9/11 attack, the bursting of the dotcom and housing bubbles and the 2008-09 financial crisis. But past performance, as investors keep forgetting, is not prologue for the future.

It’s been a long time since gold has had a major correction and those corrections have tended to be infrequent. From 1999 to 2011, gold experienced three declines greater than 20%, but snapped back each time. But this time around might be different.

Huge budget deficits, bankrupt governments and political instability aren’t necessarily a slam dunk for gold investors, as 2012 is already proving.

Interestingly, the Dollar Index—also known by goldbugs as the Grande Fiat of Fiats—rose on consecutive days during May, posting its longest winning streak since 1973.

The median estimate of 11 analysts tracked by Bloomberg project gold to average $1,740 per ounce in 2012 compared to its current trading range of $1,500.

ABN Amro cut its forecast on gold from $1,600 in January to $1,550 in May. Barclays reduced its outlook by 8% to $1,716 and RBS cut its forecast by $25 to $1,725.