Drop In Gold Price As Sudden As It Was Unexpected

The price of gold has been going up for so long that some investors forgot that it can also move in the other direction. Now, some institutional investors are betting that gold will move lower still.

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The price of gold recovered a bit today. But it's still near a two-year low and a lot of analysts are now predicting that it will fall further. Gold prices dropped 13 percent during the two-day trading period that ended Monday. And the large drop over the past few months was both sudden and unexpected.

As NPR's Jim Zarroli reports, it's causing big losses for investors who considered gold a hedge against rising inflation.

JIM ZARROLI, BYLINE: In many ways, gold is a strange and mysterious commodity. It's been viewed as a source of wealth for thousands of years, and yet, its uses are quite limited. Steven Feldman is CEO of Gold Bullion International, a trading platform for gold investors.

STEVEN FELDMAN: Historically, the market has been driven out of jewelry and some technology uses and for investment. But that investment demand really got much bigger in the middle of the last decade.

ZARROLI: Feldman says the huge run-up in gold prices has been partly driven by demand from Asia, especially China, where gold jewelry is very popular. But gold is also popular with some investors who see it as a hedge against future inflation.

MIKE MALONEY: Our central bank has gone crazy.

ZARROLI: Mike Maloney is the author of the "Guide to Investing in Gold and Silver." Maloney says the Federal Reserve and other central banks have been pouring money into the economy to stimulate growth. And like a lot of gold investors, he believes this is a catastrophe waiting to happen.

MALONEY: When you dilute the currency supply, each unit will purchase less. So each dollar will purchase less, and the expansion of the currency supply is inflation. Rising prices are the symptom.

ZARROLI: Inflation may be very low now, gold investors maintain, but it's going to get a lot worse. And over the years, that has helped drive gold prices ever higher. But there's been a big paradox lately. Central banks are still pouring money into the economy. In fact, they're doing it more than ever, and yet, gold prices are now falling. Mark Arbeter is chief technical strategist at S&P Capital IQ.

MARK ARBETER: One would think that with so many large central banks, you know, flooding the market with liquidity that these commodities would be off to the races. And I think that's what has fooled a lot of people.

ZARROLI: There have been various explanations for the gold slide. There's the slowdown in China, which is reducing demand. There's the banking crisis in Cyprus, which could force European governments to sell off more of their holdings. Whatever the reason, Mark Arbeter says, a lot of investors, big and small, are turning away from gold.

ARBETER: Everybody who has bought gold in the last couple of years now is sitting with a loss, so we had this panic selling.

ZARROLI: And Arbeter says gold will probably fall a bit more this year or at least stay in a narrow trading range. It's a view that's shared by a lot of analysts. Goldman Sachs has now advised its clients to short gold or bet that it will fall. Steven Feldman says this may be a good thing. A lot of the speculative excess is being driven out of the market. But Feldman also believes that there are still big risks in the economy, and he says gold can still be a valuable asset to hold.

FELDMAN: The case for gold is intact and it - and your entry point is meaningfully better today than it was a few days ago and certainly a year ago.

ZARROLI: At some point, gold will fall low enough to make it an attractive asset again and prices will begin to rebound. But history suggests that could take a long time. Back in 1980, gold peaked at nearly $600 an ounce and then began to fall. It didn't get back to that level for 26 years. Jim Zarroli, NPR News, New York.

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