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Gold Implodes After Death Cross — What’s Next?

After trading around $1,800 an ounce in October, gold prices have slumped dramatically in the past three months. It’s currently off 13% at around $1,570 and hit a low of just $1,554.

Major gold-based ETFs like the SPDR Gold Trust ETF (NYSE:GLD) and the iShares Gold Trust ETF (NYSE:IAU) have declined in kind.

Many miners have been hit even harder with the Market Vectors Gold Miners ETF (NYSE:GDX) down over 20%. Major gold mining stocks Goldcorp (NYSE:GG) and Rangold Resources (NASDAQ:GOLD) both down by more than 20%, with Newmont Mining (NYSE:NEM) and Barrick Gold (NYSE:ABX) are “only” down about 13% to track gold’s decline.

What’s worse: Gold prices could go even lower. Here’s why:

Charts: Gold flashed a dreaded “death cross” as its 50-day moving average finally broke below its 200-day moving average, as shown in this chart from CNBC. Historically, this pattern is a harbinger of ugly things to come.

Fading Macro Risks: There is less concern over sovereign debt shenanigans in Europe, a hard landing in China and the threat of political disasters in the U.S. via the fiscal cliff and debt ceiling. That is not to say that everything is grand with the U.S. budget, the eurozone or China, of course. But it’s less bad — and at least predictable — for investors.

Rates: When real interest rates are low or falling, gold rallies. That’s partially because inflation hawks think it’s a good hedge, but also because alternatives like Treasuries and corporate debt naturally spin off meager returns. So why not move to a different asset class? Unfortunately, this rotation works both ways — the specter of rising rates means investors move their money into interest-bearing assets again and out of gold. We are reaching the end of the line on ZIRP, and although we might not see the Fed act until 2014, nobody wants to be late to the train.

Seasonality: As Steven Russolillo of MarketBeat points out, “gold has averaged about a 2% decline in the month of March since 2000, the worst performing month of the year.” He even shares this great chart from technical analyst Michael Sacchitello:

Retail Investors Haven’t Even Begun to Sell: Perhaps the most disturbing sign comes from a separate Russolillo post on MarketBeat last week. He quotes a Wall Street insider as saying, “Gold’s poor relative performance has not gone unnoticed by a number of prominent hedge fund managers” — and quickly follows up with the fact that “mom-and-pop investors aren’t shedding their gold holdings in the same fashion that the ‘smart money’ has.” Imagine the selling pressure if those Goldline ads start disappearing and retail investors head for the hills …

A broader and more philosophical reason is that we have seen an amazing run for gold in the 21st century … and that was bound to stop eventually. In February 2001, the precious metal traded for under $260. In 2011, it topped $1,900 an ounce for a 630% gain.

Of course, later in 2011 it rolled back … and hit lows right around current levels.

Although goldbugs would love to believe that this commodity is the only true store of value, the fact is gold remains an investment and a marketable commodity like so many other assets. Speculation is common — and thus bubbles are possible, too. A decade-long bull market in gold was sure to come to an end, just as it did in the early 1980s when gold plummeted from a peak of $500 to under $300 in about four years.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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