Massacre on Gold Prices Continues (Update 1)

"Gold is caught between generally bullish long-term fundamentals, including limited mine supply growth, net official sector demand, steady exchanged-traded fund holdings, a modest recovery in jewelry demand, a reduction in recycled supply, a lack of confidence in government policies, and short-term bearish factors," said James Steel, analyst at HSBC Securities.

Among the negatives for gold is a lack of safe haven buying, a persistently weaker euro, with which gold has been moving in tandem, and lower prices, which might shake out investors as well as traders as they seek to lock in profits for the year. "We believe gold will have a tough time rallying until the euro bounces, or at least stabilizes," says Steel.

The euro was helped Thursday after a relatively successful debt auction in Spain. There was solid demand and yields were either lower or only slightly higher than the previous auction depending on the duration. The U.S. dollar index was slipping, but was off its lows on a slew of positive U.S. economic data from lower unemployment claims to stronger manufacturing data.

Despite the recent carnage in the gold market the physically baked ETF SPDR Gold Shares(GLD) shed less than one ton this week which means the ETF fell along with the underlying commodity price but that there were consistent buyers to meeting any selling.

"It's not necessary to wait for the final selling climax in any major event," says Richard Hastings, macro and consumer Strategist at Global Hunter Securities. "Just look for a few major selloffs and build new positions, and ignore the risk of a final climactic panic event."

"Gold being down 5% is interesting," says Rodney Lake, senior investment officer at George Washington University. Lake has sold down their physical gold position recently in favor of gold stocks, "we are not sure where things are going." This means that the uncertainty is keeping some investors on the sidelines. "We would want to see this last a little longer, want to see more of a sustained move down."

Jon Nadler, senior analyst at Kitco.com, is more skeptical, however, thinking that investor psychology could have been seriously damaged. "We have a crowd that has not seen a bear market in gold in its lifetime ... So we need to shake out the weak longs, but perhaps the confidence level of the strong retail investor has also been badly shaken."

Nadler says that hedge funds have changed the landscape of the gold market over the last five years, since the introduction of the gold ETFs, and the question remains what will happen to gold if they leave.

Gold mining stocks were trying to recover Thursday. Kinross Gold(KGC) was slightly lower at $11.80 while Yamana Gold(AUY) was down 0.5% at $13.91.

Other gold stocks, Agnico-Eagle(AEM) and Eldorado Gold(EGO) were trading mixed at $37.15 and $14.61, respectively.

--Written by Alix Steel in New York.

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