3 Reasons Why Gold Prices May Drop in 2013

Is it just me or is gold starting to lose its luster? After hitting as high as $1,900/ounce in late 2011, gold prices consolidated in 2012. Here are three reasons why the precious metal might slip down the charts in 2013:

1. Inverse Correlation to the U.S. Dollar

Back in 2011, I said that one reason why gold may rally was due to its inverse correlation to the dollar. With the spotlight shining bright on the Fed and its plans for QE3, gold rallied thanks to safe haven flows. Remember, traders treat gold as a hedge against inflation, so whenever it looks like the supply of Greenbacks and easy credit conditions may rise (possibly sparking inflation), gold prices tend to rise as well.

Fast forward to the present day. After launching QE3 and QE4 in late 2012, Bernanke and the rest of the FOMC would like to withdraw their bond purchasing plans by the end of the year if conditions improve, which was enough to spark this week’s dollar comeback. In turn, this could be bad news for gold bulls, as investors may begin to unload their positions in the precious metal.

2. Risk appetite on the rise

Taking a look at the charts, we can see that the euro, pound, and comdolls have picked up in recent weeks and have zoomed to new highs. With the U.S. government inching closer to a solution to the fiscal cliff, Greece being granted more bailout funds, and the Chinese government’s approval of infrastructure investments, we could see the risk trade pick up.

Of course, this doesn’t bode well for gold, as traders will go in search of higher yields. With the need for “safety” winding down, gold prices may take a hit.

3. Gold prices may be in for a correction

Gold

Just to put things into perspective, gold prices were sitting a shade above the $700/ ounce mark back in January 2009. At its peak in mid-2011, prices had more than doubled, topping out at $1,900/ ounce. That’s a 170% return had you just bought and hold!

That said, I think we could be in for a technical correction. Gold prices pretty much ranged in 2012, finding solid support at the $1,550/ ounce mark. With price now forming lower highs on the weekly chart, I wouldn’t be surprised if we see another test of support some time later this year. And if we see price close below $1,500, who knows how low price may fall!

So how exactly do gold prices affect the forex market? If you’ve gone through the School of Pipsology, then you would have learned in the Sophomore level that the Australian dollar and gold are highly correlated. With the prospect of a decline in gold prices, the Aussie may struggle to keep pace with its comdoll siblings in 2013!

But before you bet the farm and short the Aussie, you also gotta take into account the current fundamental outlook of Australia, as well as what the Reserve Bank of Australia plans to do with regards to monetary policy. Do yo’ homework and read up, my friends!

 

Will gold breach the $1,550 support level in 2013?

  • JJ6845616

    How Gold is gonna rise in the absence of risk aversion?I mean ain’t higher yielding assets(EUR,GBP) positively correlates with the Gold?

  • Freedomknight

    From a fundamental point of view, as the world will see a rise in subsea mining over the coming years, it is a risk that the supply will surpass the previous years demand. Although the rise of wealth in a region like Asia, I believe these new findings will be of no significance. From a technical point of view, it seems to me that the price is abt to hit the funnel and maybe shoot up as the price hit the support on 1550. So in my opinion, no. The gold price will rise and prob hit the 2000 during 2013. The only reason I would see a dramatic fall in price is due to confidence is back in the share market and investors go back to the stocks, but this confidence to me is a short term thing.

  • David Anderson

    I agree with Freedomknight. The gold price has to move higher. http://www.goldpricesdirect.com says gold prices may correct again before heading back up.

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