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Can Anything Stop the Drop in Gold?

First, safe-haven demand generated by another banking crisis would be gold-bullish. Continuous scrutiny of austerity plans in Greece and credit problems in China show that this possibility still exists.

Second, a sustained global recovery would boost emerging market demand for the metal (in areas like jewelry and other luxury items.

Third, on the other hand, a weakening global scenario would leave emerging markets vulnerable to external shocks. Negative developments that cause declines in stock markets would also drive investors back into safe-haven assets, pushing gold prices higher.

The final area to watch is inflation. Recent comments from Federal Open Market Committee members have indicated that inflationary pressures are expected to return as we move into 2014. Since gold is often used as to protect against inflation, any evidence of higher prices can boost the metal.

The 23% drop in gold during the second quarter has been one of the biggest market stories of the year. At the moment, there is little in the way of bullish reasoning to suggest that these declines have reached their lows.

Gold itself has no intrinsic value, so calling a bottom in the commodity is a difficult practice. Since the U.S. dollar was taken off the gold standard, inflation-adjusted prices in gold have averaged something near $750 an ounce.

So even with this year's declines, one should clearly consider the downside potential. But this does not mean there aren't any scenarios in which prices could rebound.

Those exposed to the metal, either through ETFs or mining stocks, must consider each of these possibilities.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Cox is a university teacher in international trade and finance, focusing primarily on macroeconomics and price behavior in equity markets. His articles appear on a variety of websites, including MarketBulls.net, Seeking Alpha, FX Street, and others. Investing strategies are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities). Trade ideas are generally based on time horizons of one to six months.
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