From the December 01, 2008 issue of Futures Magazine • Subscribe!

Gold losing luster

In times of economic uncertainty gold prices ordinarily take flight; this process has been suspended, at least temporarily, as the recent flashpoint in the credit crisis has been accompanied by a resurgent greenback.

Hedge funds and others are being forced to liquidate dollar denominated assets to meet margin requirements, creating a short squeeze on the dollar. That is offsetting the flood of stimulus and bailout dollars, deferring what ordinarily would be inflationary forces.

“It makes sense to me that we would go through a period of deflation and then all this liquidity out there will cause an inflation,” says John Carter, president of Tradethemarkets.com. He says gold will trend down to $640 per ounce in 2008, before working higher. “Gold in the $600 to $700 range is a buy. Inflation will rear its ugly head in late 2009,” pushing gold to $1,250 by midyear, he says. The wild card would be an Eastern European country going into default, as Iceland and Hungary have.

“I am not looking for a lot of upside action here,” says Donna Heidkamp, senior trading advisor, RJO Futures. “Fundamentally the supply is very tight,” she says, but technically it is in a consolidation. “If we have a breakout based on the triangle we have been trading in here over the last month, it would indicate a breakout to the downside,” and could trade down to $600 in December, she says. Key support is between $640 to $650.

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