Why Gold Prices Are Down: The December Effect (GLD, IAU, SLV, UGL)

Diane Alter: Gold prices plunged Thursday, hitting lows not seen since August, after the U.S. Commerce Department reported an unexpectedly robust reading on third quarter U.S. gross domestic product (GDP). 

After the surprising strong report, February gold tumbled $14.50 an ounce to $1,653.50 and spot gold sank $22.80 to $1,643.10.

Silver prices fell as well, losing $1.13 to $29.95 shortly before noon. Prior to the report, the yellow and white metals were little changed.

The fresh report revealed GDP in the third quarter expanded at an annual rate of 3.1%, the fastest growth since late 2011. That was up from the 2.7% pace logged last month, and better than economists’ expected 2.8% rate.

Phil Streible, a senior commodity broker at R.J. O’Brien & Associates in Chicago told Bloomberg News, “The GDP number was better than forecast, so the thinking is that improving conditions in the economy might mean a light at the end of the tunnel on when the Fed will end QE3.”

Gold and silver have been big beneficiaries of the FOMC’s generous QE3 programs.

But there’s more than the end of QE measures as to why gold prices are down.

Why Gold Prices Are Down: The December Effect

Weighing on gold since the start of the December is the typical decline in “long” trading activity for the commodity as the year winds down.

The Wall Street Journal recently noted that gold traders frequently shun holding large gold positions in the last several weeks of any given year due to thin trading volumes and a scarcity of buyers and sellers that tend to enhance volatility and cause wide price swings.

What’s also going on is profit taking.

Money Morning Capital Wave Strategist Shah Gilani told FOX Business Network Thursday that gold’s huge price move has to do with the metal becoming a trading vehicle.

“Gold has become a tradable asset class,” explained Gilani. “It’s no longer a hedge. It’s no longer what it used to be. Investors are buying and selling gold as they would any other commodity, as they would any stock, as they would any ETF, as they do Apple (Nasdaq: AAPL),” said Gilani.

Just as investors are taking profits in other winning assets, they are doing so with gold, which makes for more sellers than buyers ahead of the New Year.

Before Thursday’s steep sell-off, gold was up some 6.43% year-to-date, on track for its 12th consecutive yearly gain. Shares of the yellow metal began 2012 at $1,536.20. Since December 2008, gold prices have skyrocketed 89%.

Holdings in gold-backed exchange traded products have swelled to a record 2,631.79 metric tons, a 12% increase this year.

Gilani pointed out that gold’s recent fall is something of an anomaly given the liberal and loose monetary policies both here and abroad, which have devalued paper currencies and stoked inflation jitters.

But don’t expect the selloff to continue long into the New Year.

As Tanweer Akram, a senior economist at ING Investment Management told Reuters, the GDP pace in the current quarter “remains quite soft,” which will drive investors back to gold.

For investors looking to play gold prices when the rise again, Gilani said SPDR Gold Trust (NYSEARCA:GLD) is an option, especially if it maintains a support level at $150. Down 1.6% in afternoon trading and changing hands around $158, shares have traded as low as $148.28 and as high as $174.07 this year.

Related: SPDR Gold Trust (NYSEARCA:GLD), iShares Silver Trust (NYSEARCA:SLV), iShares Gold Trust (NYSEARCA:IAU), Ultra Gold (NYSEARCA:UGL).

Written By Diane Alter From Money Morning

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