Gold, Silver Hammered -- Why Prices Should Rebound

Traders hammered gold and silver Thursday after gross domestic product data for the third quarter were revised higher, suggesting the economy is improving more than expected, lowering their appeal as safe havens.

"If you believe the economy is strengthening, there will be less need for the Federal Reserve to print money, making gold less attractive as an inflation hedge," said Alan Zafran, a partner at Luminous Capital in Menlo Park, Calif. "As the U.S. economy improves, there's less need for the Federal Reserve to pursue aggressive monetary policies. Concerns about inflation arising from Fed action may be overstated."

Spot gold prices dropped 1.25% to $1,646.0 an ounce.

SPDR Gold Shares ( GLD ), tracking a 10th of an ounce of bullion, gapped down 1.47% to 159.32 -- a four-month low. It fell below the key 200-day moving average for the first time in four months, indicating severe weakness. Volatility tends to increase below this line. Intraday trading ranges widen and the biggest upside and downside moves tend to occur below the 200-day.

PowerShares DB U.S. Dollar Index Bullish ( UUP ), measuring the greenback against a basket of major foreign currencies, was nearly flat.

Market Vectors Gold Miners ETF ( GDX ) skidded 1.76% to 44.56 -- a four-month low. It's fallen below both the short-term 50-day moving average and the 200-day moving average, a sign of a strong downtrend.

Traders blamed the selling on year-end tax selling on fears of higher tax rates in the New Year if the country goes over the fiscal cliff. They also attributed it to automatic stop losses being triggered at key price support levels. The 200-day moving average is a widely used line in the sand that traders use as a buy and sell signal. An automatic stop loss is a tool used at brokerages in which traders pre-program their accounts to automatically sell a position when a given price is reached.

"Gold may be searching for a temporary bottom today," Jay Pasch, co-founder of, said in an email. "We believe that the selling may be overdone at this point and the market could bounce from the $1,633 (an ounce) level."

Gold has fallen for three days straight. It broke below the "neckline of a bearish head-and-shoulders pattern," which could send prices to $1,616 an ounce, commodities analysts at Scotiabank wrote in a research report.

Patricia Mohr, a commodities analyst at Scotiabank, projects the yellow metal will trade at an average price of $1,750 an ounce in 2013 after trading at an average price of $1,670 this year.

The gold and silver bugs were undeterred and believe the fundamental reasons for owning gold remain: the Federal Reserve and central banks around the world are printing money in overdrive. That will devalue their currencies, boost inflation and drive up precious metals prices, which serve as a store of value.

"Market pricing can lead you to panic emotionally when in reality not that much has changed fundamentally," Mark Thomas, founder of, wrote in a client missive.

"Gold's recent decline is the result of the market focus on the 'fiscal cliff, but once we enter the New Year, regardless of the outcome of this issue, the monetary factors should dominate once again," Adrian Day of Adrian Day Asset Management in Annapolis, Md., said in an email. "So far this year, central banks have announced purchases of almost 8.3 million ounces. Although down from last year's 12 million, central banks often announce purchases at quarter end, not when made, so this year's total could approach last year's, and is still a sharp reversal from the net selling we saw from 1975 through 2008.

"The global average for gold holdings in bank reserves is 14%, whereas just under 2% of China's foreign-exchange reserves are in gold. Most other emerging economies hold between 3% and 6%."

Silver Prices

Silver prices plummeted 3.62% to 29.96 an ounce.

IShares Silver Trust ( SLV ) collapsed 4.25% to 28.83, a four-month low. It broke below its 200-day moving average for the first time in four months, marking severe weakness.

Global XSilver Miners ETF ( SIL ) fell 1.69% to 22.12. It's still trading above its 200-day line, but below its 50-day line.

Gross Domestic Product Surprise

Real gross domestic product climbed at an annual rate of 3.1% in the third quarter, according to the Bureau of Economic Analysis. The figure was revised up from its previous estimate of 2.7% and far exceeded the 2.8% that economists had expected. Real GDP expanded 1.3% in the second quarter.

"The latest revision was a healthy one, because it was not driven by higher inventories," Nigel Gault, chief U.S. economist at IHS Global Insight, wrote in a commentary. "This time, final sales growth was the driver, revised up to 2.4% from 1.9% as net exports, consumer spending and state and local construction spending were all revised up."

Gault added: "Q3 2012 is the strongest quarter since the 4.1% growth rate in Q4 2011. However, it remains the case that a spike in defense spending and faster inventory accumulation were the prime drivers of the acceleration in growth from 1.3% in Q2 to 3.1% in Q3.

"We still expect both defense spending and inventories to be drags on growth in the fourth quarter. Hurricane Sandy will also hurt. We still expect growth to decelerate to just below 1% in the fourth quarter.

"Beyond that, all will depend on the resolution of the fiscal cliff negotiations. The longer the negotiations drag on -- especially if they extend into January -- the more the uncertainty will hurt consumer and business confidence, and willingness to spend. A timely resolution will help confidence, but we should not expect the economy immediately to spring to life.

"After all, the president has dropped the payroll tax cut from his most recent offer, which will cut paychecks by around 1% of total disposable income next year."

Follow Trang Ho on Twitter @TrangHoETFs .

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

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

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