Gold drops to 7-month low, flirts with 'death cross'February 20, 2013: 2:27 PM ET
Gold prices dropped to a 7-month low Wednesday, and are on the verge of hitting a technical level that could signal more bearishness ahead.
Gold, which has tumbled more than $200, or 12%, since early October is close to forming a so-called death cross, the term for when the 50-day moving average breaks below the 200-day moving average.
The last time gold prices entered into death cross territory was in April 2012, when prices were down 8% from their most recent peak; prices sank another 6% during that period before turning higher and moving out of the death cross.
While the death cross is primarily important to technical traders, the fact that gold prices are near it "speaks volumes to the sharp fall we've had in gold prices following an incredible uptrend," said James Cordier, president of Liberty Trading Group.
Investors typically turn to gold during times of economic uncertainty and as a hedge against inflation, and lately, investors have shifted from a sense of fear, fueled by a global economic slowdown and uncertainty, to optimism, he added.
"A lot of the dark clouds have left the sky: economies around the world are picking up and inflation fears have left the radar screen for now," said Cordier. "Investors have decided they want to be in riskier assets like stocks and are considering gold to be a dead investment."
If the global economy continues to improve and worries about inflation remain muted, the negative momentum could push gold prices down to around $1,525, said Cordier.
Gold settled at $1,578 an ounce Wednesday.
The looming death cross gave StockTwits traders plenty to talk about.
That's a good point. While death cross sounds scary, by the time assets approach that level they have "probably already significantly underperformed and could be due for a bounce," according to study from Schaffer's Investment Research.
While gold prices have come down sharply from their record highs above $1,900 hit in September 2011, I wouldn't call it a crash quite yet. Economies have improved but many still have a long way to go before they're out of the woods. And inflation may be subdued for now, but given all that money the Federal Reserve's been printing the last few years, that's bound to change.
True. Gold prices have declined about 5% this year, but gold stocks (GDX) have tanked about 18% -- missing out entirely on the broader stock market rally.