8 Reasons Gold May Disappoint in 2013


Nobody's going to change the mind of gold bugs, but after recording its 12th consecutive yearly gain, gold's bullish run may be set for a pause. Here are eight reasons that put gold's rally at risk:

1) Risk Appetite is Increasing Since the beginning of the year, the CBOE Volatility S&P500 Index (^VIX) has fallen an incredible 37% as risky investing surges. Gold (NYSEARCA:GLD), U.S. Treasuries (NYSEARCA:TLT) and other "safe-haven" trades have slumped in value. Meanwhile, higher risk assets like emerging market stocks (NYSEARCA:VWO) and small cap stocks (NYSEARCA:IWM) have climbed.  2) Physical Demand is SlidingAlthough Q3 2012 gold demand was up 10% up from the previous quarter, it was down year-over-year. In value terms, demand was worth $57.6 billion or 14% below Q3 2011. Investment demand was 16% below the exceptional levels witnessed in Q3 011, led by a steep drop in the bar and coin segment.

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3) End of QE Gold rallied around 70% from Dec. 2008 to Jun. 2011 during the Federal Reserve's first two rounds of quantitative easing (QE). But how would it react without QE? All things must end and QEternity may be in its final inning. Several Fed officials, according to minutes from last month's meeting, want to stop asset purchases, citing worries about the Fed's bloated balance sheet and financial stability. Ending QE could put downward pressure on gold.

4) Overly Bullish Gold Sentiment The Bloomberg News poll of traders, investors, and analysts predicting higher gold prices (NYSEARCA:IAU) are near 75, which puts it in elevated territory. Over the past year, we've experienced better upside trades in gold prices when bullishness is below 50. (see chart below)  

5) Rising SpeculationOpen interest data from the U.S. Commodity Futures Trading Commission shows gold call option buying is outpacing bearish puts by roughly double. When the crowd bets heavily in favor of a certain trade, usually they're wrong.

6) Central Banks are Slowing Gold Purchases Central banks continued to purchase gold in the third quarter, but at a slower pace; demand of 97.6 tonnes, worth $5.2 billion accounted for 9% of overall gold demand during the period. Diversification of reserve assets remains the driving force behind gold investments by central banks.

7) A Break in Momentum Gold registered its 12th consecutive yearly gain in 2012 by rising 7%.  That's an incredible streak - its best since 1920. But in reality, gold has been in correction mode since September 2011. It's unrealistic to expect gold prices to register yearly gains indefinitely.   8) Higher Gold Taxes in India Bloomberg reports that India may increase taxes on gold imports to help cut its current account deficits, says Finance Minister Palaniappan Chidambaram. Why does it matter? Not only is India the world's largest buyer of gold bullion, but less than 1% of the world's gold is mined there. Taxes could eventually be raised from 4% to 6%. What type of impact would this have on gold prices?Here's another interesting fact: On a relative performance basis, we continue to see gold underperformance versus other major asset classes, including U.S. stocks (NYSEARCA:DIA), real estate (NYSEARCA:VNQ) and even European stocks (NYSEARCA:VGK). Is relative underperformance a sign of strength or weakness?

The ETF Profit Strategy Newsletter outlines sentiment measures along with key support/resistance levels for high probability trades in stocks, bonds, metals, and currencies.