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Gold 'Is Finished'

This article is more than 10 years old.

A year or two after fans of Glenn Beck and every conservative minded talk show or website told their followers to double down on gold, the precious metal's bull run is over.

On Monday, the SPDR Gold (GLD) exchange traded fund, the most popular way to trade gold, fell by more than 8% in the morning trading session. Gone are the days when people said gold had a real shot of hitting $2,000 an ounce.

And again on Monday, the guys over at Daily Reckoning who forecast the housing bubble and gold's bull run many years ago, said the gold bull "is finished."

"Gold is now in a bear market," said Greg Guenthner from Daily Reckoning in Baltimore, Md. "No, it won’t hemorrhage $100 a day until it hits zero. But it will continue to trend lower once the shock of this initial downward push wears off. The great golden decade that saw prices leap from $300 to almost $2,000 is finished," he said in today's email newsletter.

Gold's decline may have very well went into high gear on Friday. Sell orders started flowing into the gold futures market by mid-morning, pushing gold prices down by $35 an ounce within minutes. By late Friday afternoon, gold was barely clinging to $1,480. Guethner said that puts gold in “official” bear market territory -- a 20% correction from its 2011 top.

"You must accept the fact that gold has entered a bear market," said Guenthner. "If you expect prices to snap back to $1,800, you’re going to be waiting a long, long time. Also, you’ll hear a lot about how gold is oversold after this huge drop. But it’s too early for this type of analysis. Unfortunately, merely being oversold will not lead to a massive rally that magically pulls gold out of its slide. In fact, most bear markets begin with scale-tipping oversold readings. Stocks were massively oversold in summer 2008. That was not exactly the best time to be a buyer."

Gold pushed to higher levels throughout much of the 2000s as a hedge against inflation and an ever weakening dollar. It strengthened after the crash of 2008, with many analysts within the bulge bracket banks calling for gold to top $2,000 an ounce, citing monetary easing by the world's Central Banks. But even as the world's Central Banks continue to print money, the gold bug has lost its energy.

Guenthner's long term price target on gold is now around $1,100 an ounce, which would take the SPDR Gold ETF to round $110 a share from its current level of $132.

The secular bull market for gold is over, said Paul Hoffmeister, senior economist with Bretton Woods Research. The firm is a spin-off of the old Polyconomics indie research firm run by gold bug and famous supply side economist Jude Wanniski.

Hoffmeister said there are other matters not supportive of gold at the moment.

The decline in gold from $1900 during the last year and a half is primarily due to improvement in the European variable -- particularly the reduced risk of the euro currency disintegrating from its current form -- and the expectation that quantitative easing will end sooner rather than later.

Most likely at some point next year.

Some other non-supportive issues include North Korea and South Korea. The poorer north is making amends with the richer south. There will not be a war afterall, as if anyone really believed there would be.

On Wednesday, after President Obama released his budget blueprint, House Budget Chairman Paul Ryan and Senate Budget Chairwoman Patty Murray announced a plan to negotiate a compromise between their different versions. The President’s Buffett Rule ideas are virtually dead on arrival given that House Republicans will reject them. House Ways & Means Chairman Dave Camp has confirmed that, showing that he has no inclination to significantly raise taxes. Importantly, in testimony before Congress last week, Treasury Secretary Jack Lew stated that the degree of tax revenue increases (tax increases) were a key point of negotiation between both parties.

Clearly, the White House will need to bend on its tax demands to accomplish anything, Hoffmeister said on Friday.

The U.S. deficit is shrinking. During the first six months of the government’s fiscal year (October 2012 – March 2013) it fell to $600 billion from the $779 billion in the period last year.

Europe is also looking a wee bit better. As suspected, the banking risks that erupted during the Cyprus crisis have accelerated the political pressure to forge a banking union in Europe. Treasury Secretary Lew pressed for it last Monday during his visit to Europe in advance of the meetings between European finance ministers last weekend.

The market is actually a bit more positive on the E.U., sending gold lower as well.

Joseph Meyer, newsletter editor at Straight Money Analysis, took a different tack in his April issue. He expects gold to rebound strongly this summer and possibly into new highs.

Periods of economic downturn are generally good for precious metals investors. Meyer said that he believes the sovereign debt crisis in Europe is far from over. "We will continue to see mounting problems in the European Union unfolding in 2013 and 2014. The debt problems in the EU are just one reason why we will see investment demand for gold continue to grow, primarily in China and India," he said.

Inflation is already showing up at the gas pump and in the grocery store. This means the buying power of the dollar is continuing to erode and gold will be used as a hedge.

On Monday morning, CNBC host Jim Cramer said on his Twitter page that he still liked the gold ETF, but fell short of recommending a buy. Cramer said he was a buyer since GLD was in the $800s.

"The gold-based hedge funds must be thinking about selling their Amagansett and East Hampton houses," he joked in a Tweet this morning about gold's melt down.