Gold Prices Flat As QE3 Hype Fades, S&P500 Sinks

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Gold prices were flat Wednesday as the buying hype surrounding the Federal Reserve's third round of quantitative easing faded and the metal lost appeal as a safe haven amid an outlook for weak corporate earnings and inflation.

Spot gold fell 0.07% to $1,763.70 an ounce.SPDR Gold Shares ( GLD ), tracking a 10th of an ounce of bullion, eased 0.10% to 170.82 as it fell for a fourth day straight.

"With the QE impact having run its course, I am not seeing the gold trade benefiting over the next couple of years," said Andrew Hill, who manages $33 million in assets as co-founder of Andrew Hill Investment Advisors in Naples, Fla.

"Also, the hype- and fear-based advertising for gold seems much like the real estate market six years ago, although that is not enough of a reason to sell your gold holdings."

He's holding 95% of his assets in stocks, with no commodities.

SPDR S&P 500 ( SPY ) fell 0.61% to 143.33, kissing price support at its 50-day moving average.

PowerShares DB U.S. Dollar Index Bullish ( UUP ) slipped 0.23% to 21.90. It's been trading below its 200-day moving average for six weeks, which is very bearish.

GLD has outpaced SPY the past three months by 4 percentage points, so some profit-taking would be normal. The gold bears contend QE3 can't spark inflation enough to fuel gold prices. The program's $40 billion a month in mortgage-backed securities purchases is too little to make a difference in a market worth $8.5 trillion.

What's more, money flying off the printing press is sitting in banks and not being lent out. Companies and consumers are deleveraging or paying back loans instead of borrowing more money.

"Gold is only a place to hide when people think the world really will end, or there is a huge expectation of inflation; we aren't seeing that now," said Lee Munson, chief investment officer at Portfolio LLC in Albuquerque, N.M. "Slow to no growth doesn't give gold the juice it needs."

Gold hasn't been a safe haven and has moved in sync with risk assets. It corrected sharply after QE1 and QE2 as traders opted for cash. It currently has a 0.82 correlation with SPY. A reading of 1 means perfect correlation and -1 means no correlation.

SPY has entered a correction on a tide of negative corporate pre-announcements, owing to slowing overseas demand. Third-quarter earnings are projected to fall 2% year over year, marking the first quarterly drop since 2009.

"We are about to enter the first deflationary downturn in 80 years," said David Hunter, chief market strategist at KCCI Ltd. in Boston. "We have seen the highs of the recent gold rally and it is now beginning to roll over. Like all commodities in a deflationary bust, it will sell off sharply."

He projects gold's price will crash 43% from its current level to $1,000 an ounce, which would translate to about $100 a share for GLD.

On the other hand, gold has carved a bullish chart pattern. GLD has formed a four-weeks-tight pattern in which its weekly closes are within 1% of the prior week's close four straight weeks.

"For now, this consolidation still looks healthy," said Cyril Berkouk, a technical analyst at Trading Central. With the gold-to-S&P 500 price ratio rising at a healthy clip and as long as GLD holds above price support at its May peak of $162 a share, its chart looks bullish, Berkouk added.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

Referenced Stocks: GLD , SPY , UUP

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