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8 Reasons Gold May Disappoint in 2013

8 Reasons Gold May Disappoint in 2013
Ron DeLegge, Editor
January 8, 2013

Nobody’s going to change the mind of gold bugs, but after recording its 12th consecutive yearly gain, gold’s bullish run may be set for a pause. Here are eight reasons that put gold's rally at risk:

1) Risk Appetite is Increasing
Since the beginning of the year, the CBOE Volatility S&P500 Index (^VIX) has fallen an incredible 37% as risky investing surges. Gold (NYSEARCA:GLD), U.S. Treasuries (NYSEARCA:TLT) and other “safe-haven” trades have slumped in value. Meanwhile, higher risk assets like emerging market stocks (NYSEARCA:VWO) and small cap stocks (NYSEARCA:IWM) have climbed.
2) Physical Demand is Sliding
Although Q3 2012 gold demand was up 10% up from the previous quarter, it was down year-over-year. In value terms, demand was worth $57.6 billion or 14% below Q3 2011. Investment demand was 16% below the exceptional levels witnessed in Q3 2011, led by a steep drop in the bar and coin segment.

3) End of QE
Gold rallied around 70% from Dec. 2008 to Jun. 2011 during the Federal Reserve’s first two rounds of quantitative easing (QE). But how would it react without QE? All things must end and QEternity may be in its final inning. Several Fed officials, according to minutes from last month’s meeting, want to stop asset purchases, citing worries about the Fed’s bloated balance sheet and financial stability. Ending QE could put downward pressure on gold.

4) Overly Bullish Gold Sentiment
The Bloomberg News poll of traders, investors, and analysts predicting higher gold prices (NYSEARCA:IAU) are near 75, which puts it in elevated territory. Over the past year, we’ve experienced better upside trades in gold prices when bullishness is below 50. (see chart below)  

5) Rising Speculation
Open interest data from the U.S. Commodity Futures Trading Commission shows gold call option buying is outpacing bearish puts by roughly double. When the crowd bets heavily in favor of a certain trade, usually they’re wrong.

6) Central Banks are Slowing Gold Purchases
Central banks continued to purchase gold in the third quarter, but at a slower pace; demand of 97.6 tonnes, worth $5.2 billion accounted for 9% of overall gold demand during the period. Diversification of reserve assets remains the driving force behind gold investments by central banks.

7) A Break in Momentum
Gold registered its 12th consecutive yearly gain in 2012 by rising 7%.  That’s an incredible streak – its best since 1920. But in reality, gold has been in correction mode since September 2011. It’s unrealistic to expect gold prices to register yearly gains indefinitely.  

8) Higher Gold Taxes in India 
Bloomberg reports that India may increase taxes on gold imports to help cut its current account deficits, says Finance Minister Palaniappan Chidambaram. Why does it matter? Not only is India the world’s largest buyer of gold bullion, but less than 1% of the world’s gold is mined there. Taxes could eventually be raised from 4% to 6%. What type of impact would this have on gold prices?

Here’s another interesting fact: On a relative performance basis, we continue to see gold underperformance versus other major asset classes, including U.S. stocks (NYSEARCA:DIA), real estate (NYSEARCA:VNQ) and even European stocks (NYSEARCA:VGK). Is relative underperformance a sign of strength or weakness?    

The ETF Profit Strategy Newsletter outlines sentiment measures along with key support/resistance levels for high probability trades in stocks, bonds, metals, and currencies.

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CommentsAdd Comment

Ron the Editor said on June 07, 2013
  Hi RJ,
Everything you said makes sense, the only problem with your thesis is that gold prices HAVE NOT been going UP! (FYI, prices are down -25% since 2011.) The fact that precious metals prices are down - for whatever reason, manipulation, hoarding, etc. - doesn't really matter to us. We don't care. All we care about is one question: How do we turn it into a money making opportunity?

The difference between us and the gold cult is that we remove our personal biases and feelings from the our investment decision making. Our opinions, feelings, and hunches don't matter! In ALL MARKETS, gold included, prices are always a leading indicator. All of the other stuff, is just there to sidetrack you from what's really important. If you ignore what the technicals and price action of metals are REALLY telling us today, you do so to your own peril. You cannot succeed with blinders on. Best wishes.

RJ Braun said on June 06, 2013
  So I guess you believe the Chinese are just accumulating as much Gold as they can for a rainy day. Ounce the Chinese peg there currency to gold we will be selling our aircraft carriers to pay our bills. Don't think the new oil boom will save us, it will go into the oil company's coffers for the Romney's and Bush's of this world. Quit sharpening your pencil and take a sobering view at what is really happening out there in the real world. The Chinese are buying everything they can get and it's all for power. If you knew what you were talking about you would be telling people to sock away as much gold as they can protect themselves when the Chinese say we don't want anymore greenbacks but will take your gold instead.
clay mont said on May 31, 2013
  I have owned gold and silver funds for about 8 years and have seen very good growth i purchased gold funds at 832.00 oz and now they are back up to 1400.00 oz are you telling me that gold will drop below 1000.00 oz
I have also heard that the big money people are selling off there gold ie: George Soros in order to drive the costs of gold back down. But the bargain buyers are scupping it up so it seems that it is not working to there advantage as well as they thought.
WildCard43 said on May 29, 2013
  Hi Peter,

Love the sarcasm, now for some REAL LIFE cold hard facts:

Gold is -27% from Aug.22, 2011 - May 28,2013

You can invent in your mind all the reasons gold should be going up in value - market manipulation, threat of confiscation, potential for return of gold standard, shortage of physical, etc. - but NONE OF IT has stopped gold prices from sliding.

Stop trading with your heart and start trading with your brains.

peter burtoft said on May 29, 2013
  Absolutely Brilliant!!! I have unloaded all of my precious metals equities...I'm sick and tired of having
to settle for QUADRUPLING my portfolio during these latest ten years of retirement.

I am now looking forward to doing a lot better with stocks like Nortel...Apple...and Ford Motors.

Ha Ha...wait 'till you see what the precious metals do within the next 24 months...KABOOM!!!
paul said on May 17, 2013
  take a look at the 8 reasons
Paull Cudak said on February 21, 2013
  I've been a coin & metals collector since age 8 and have always dollar cost averaged my investments whether it be stocks or metals. I'm now 60 and my wife never understood my hobby until she saw its total value. If you do get into it (metals or coins) as with any investment if you are married, make sure your spouse learns otherwise she could be taken by some shark after your demise and your investments will be for not and she destitute
I think physical ownership is better than shares, if you get into serious collecting you appreciate the art as well as the value of the piece. READ & LEARN, DO YOUR DD TOO MANY SCAMMERS OUT THERE. It isn't hard just takes a little knowledge

ZebrAA said on January 16, 2013
  Silver is a better bet than gold. It has industrial usage plus it's outperformed gold over the past 5 yrs. I don't see that changing either.
CharleyBN said on January 09, 2013
  Jim Rogers says he foresees a breakdown in gold prices. Kind of surprising coming from a commodity perma-bull.
goldDIGGER said on January 08, 2013
  I'd rank #3 and #8 as the biggest risks to gold upside. You could also say #9 would be panic selling by the public if gold fell double digits.
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