Q&A: Is this the end of the road for the gold rush?

Thu Sep 22, 2011 4:13pm EDT
 
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(Reuters) - Growth is stalling, the euro zone is flailing, the Fed is spent and risk markets are melting down -- yet gold, the one asset that has consistently rallied in similar circumstances over the past year, is in a tailspin.

After a month of unprecedented volatility that has rattled some investors' confidence in gold's decade-long winning streak, the question is obvious: Is this what the popping of a gold bubble looks like?

The answer, of course, isn't obvious. The bursting of asset bubbles is best seen in retrospect, and gold's 10 percent decline from a record high just three weeks ago is far from its worst tumble; it last suffered such a setback in late 2009, and multiple times in 2008. It is only halfway to the 20 percent mark that separates a correction from a bear market.

While a survey of the best minds of the bullion market predicted this week that gold would continue to power higher over the next year, topping $2,000 an ounce, there are undeniable warning signs flashing along the way, threatening to undermine one of this year's top-performing assets.

Returns this year: r.reuters.com/suz52s

Spot gold prices tumbled more than 3 percent to a one-month low of $1,721 an ounce on Thursday, falling further out of favor as a global round of risk aversion triggered by weak Chinese manufacturing data and grim comments from the Federal Reserve hit commodity markets especially hard.

The U.S. dollar index .DXY rose 1.25 percent and U.S. stock indices fell nearly 4 percent. Brent crude dived by $5 a barrel, copper logged its biggest loss since October 2008 while sugar and grains slumped 5 percent.

Without calling a top in a market that has consistently proven all but the most intrepid gold bugs wrong, below are several factors to consider when weighing whether this is the end of the road or just a big bump in it.

RISK CORRELATIONS IN TATTERS, DOLLAR DRIVER RETURNS   Continued...