Why Gold Has Big Problems

The precious metal is now trading at a 5-year low and there is little reason to believe gold will rebound anytime soon.

1. Gold Gets Hammered

Global investors are hammering gold so hard, the shiny metal has hit a 5-year low with prices hovering around $1,104 an ounce.  Traders are eyeing $1,100 as a key support level. Breaching this will likely add further downward pressure to prices. During an appearance on the FOX Business Network's Varney & Co. Jim Awad, of Awad Asset Management, said "its a benign environment" suggesting investors are not compelled to own safer assets.

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2. No Inflation

Traditionally investors use gold as a hedge against inflation. The problem is there is hardly any. The 50% drop in oil over the past year has pushed gas prices down which in turn has kept consumer inflation near zero according to the Federal Reserve. Even core inflation, which strips out food and energy costs, remains under 2% which is where the Fed would prefer to see it.

3. Public Enemy #1

Fed Chair Janet Yellen tops the list as Public Enemy #1 for Gold Bugs. In a speech on July 10 Yellen reconfirmed a rate hike will happen in 2015. “I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy.”

And this week in an exclusive interview St. Louis Fed President James Bullard took it a step further telling FOX Business Network there is “more than a 50% chance” of a rate increase at the Fed’s September meeting.

Rising interest rates tend to be bearish for gold because it signals the economy is improving making investors less inclined to hold safer assets such as gold.

4. King Dollar Fuels Gold’s Bearish Beat Down

The U.S. Dollar has strengthened in preparation for higher interest rates. Many foreign investors are selling commodities, such as gold, to buy the safe haven of the greenback on the view it will continue to appreciate as the Fed plots to gradually raise interest rates. Over the past 12-months, the dollar has advanced 25% vs. the euro.

5. U.S. Stocks Trading at Record Levels

Despite some volatility, the Dow Jones Industrials, S&P 500 and Nasdaq Composite are all hovering at or near record levels. In particular, the Nasdaq notched up a fresh record on July 20 and has advanced 18% this year.

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Many global investors are dialing up their risk profile by cashing in on commodities, such as precious metals, and using dollars to buy U.S. Stocks, according to RBC Wealth’s George Gero.