Gold and silver prices plunged in heavy trading despite the dollar weakening while the stock market rallied Tuesday.
Spot gold prices dropped 1.52% to $1,672.20 an ounce to a six-week low and close to its 200-day moving average -- a key technical level that often provides support. A break below this line confirms a strong downtrend.
PowerShares DB U.S. Dollar Index Bullish ( UUP ), measuring the greenback against a basket of major foreign currencies, slipped 0.34% to 21.68, a two-month low. The dollar weakening along with gold is rather unusual as the two typically trade opposite each other.
The strength of the U.S. and global markets implies that institutions are moving money out of precious metals and into equities, said Don Vandenbord, a portfolio manager at Camarda Wealth Advisory with $250 million in assets under management in Fleming Island, Fla.
Precious metals fell as the SPDR S&P 500 ETF ( SPY ) popped 1.02% to a two-month high of 145.25 on optimism that lawmakers are finding a compromise to prevent the country from going over the fiscal cliff.
"Clearly, whatever the outcome and however we get there, taxes are increasing; Republican House leader John Boehner has given away his negotiating strength and conceded that," Adrian Day, president of Adrian Day Asset Management in Annapolis, Md., wrote in an email. "The fear is that higher taxes may see the U.S. economy slide into a recession, and recessions are typically bad for gold.
"At the same time, the absence of a deal would also potentially hurt the economy (in the near term at any rate) and that equally would be negative for gold."
Gold Bulls Vs. Bears
However, monetary policy is the main driver of gold prices, Day noted. Central banks in Japan, the U.S. and the Europe have all indicated providing more economic stimulus, which should be positive for gold.
"The only options for the economy going forward are massive money printing or a horrific deflationary descent, and the deflationary course will be vigorously fought by the Fed," Christopher Blasi, president of precious-metals dealer Neptune Global Holdings in Wilmington, Del., wrote in an email.
As a gold perma-bull, he believes the sell-off offers traders a chance to buy on weakness.
Yiorgo Aretos, founder of TMP Group, attributed the sell-off to profit-taking that happened to coincide with events on Capitol Hill. His target price on gold is $1,760 an ounce. China stockpiling the yellow metal to back its currency should lift gold prices.
Andrew Hill, president of Andrew Hill Investment Advisors in Naples, Fla. with $33 million in assets under management, says he sold his gold holdings six months ago on the belief that the impact of quantitative easing on financial markets is waning and the dollar is stabilizing.
Inflation is moderating, the risk of total financial collapse is declining and gold is overhyped like real estate was a few years ago, he says.
"We view today's down move in gold as a probable crack in the dam before the flood," Andrew Norman, an analyst at BullAndBearMash.com in Plano, Texas, wrote in an email.
Gold traders may be expecting the dollar to rally against the euro, yen, pound and Canadian dollar. The yen has been freefalling since September and he believes the other currencies will follow soon. Commodities and the U.S. stock market will likely "fall hard" when the dollar climbs.
Gold may find price support at the 200-day line, but it needs to rise above $1,723 or $1,724 an ounce to trigger a buy signal, Jay Pasch, co-founder of jtrader.us, recommended to clients.
Bill Strazzullo, chief market strategist at Bell Curve Trading in New Jersey, believes gold will fall to $1,630 to $1,640 an ounce.
SPDR Gold Shares ( GLD ), tracking a 10th of an ounce of bullion, tumbled 1.48% to 162.01 in three times average volume. GLD fell to its 200-day moving average and its lowest level in nearly four months.
Market Vectors Gold Miners ETF ( GDX ) tumbled 1.70% to 45.75. It's broken below the 200-day line, which marks a strong downtrend.
Silver prices plunged 1.95% to 31.65 an ounce.
Strazzullo of Bell Curve expects the white metal to fall to $31 to $31.20 an ounce. Aretos of TMP Group set his target on silver at $52 an ounce.
IShares Silver Trust ( SLV ) dropped 1.84% to 30.63 in double average volume. It's still above its 200-day line, which indicates a weak uptrend.
Global X Silver Miners ETF (SIL) fell 1.43% to 22.75. It's also trading below its 50-day line but above the 200-day, typical of a weak uptrend.
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.