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What to watch: Plunging gold prices

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goldenpolarbear   Friday, 12/20/13 10:03:54 AM
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What to watch: Plunging gold prices
John Waggoner, USA TODAY 7:16 p.m. EST December 19, 2013
Price of yellow metal fell $36.20 to $1,195 per ounce Thursday --lowest since August 2010.

Latest sell-off in gold stemmed from Federal Reserve's decision to dial back on its monthly bond buys
Gold prices typically rise on fears of economic instability and monetary inflation
Demand for gold should start to rise if economies in China and India start to pick up steam up again

The price of gold got hammered Thursday, as the yellow metal fell $36.20 to $1,195 per ounce, the lowest since August 2010.

Jeff Nichols, editor of NicholsOnGold.com, says that the selling stemmed from the Federal Reserve's decision to buy $10 billion fewer bonds each month than it has been, starting in January. The decision signals that the Fed thinks the economy is recovering.

MORE: 5 reasons stocks didn't suffer a 'taper tantrum'

Gold typically rises on fears of economic instability and monetary inflation. When investors worry that paper money may lose its value, they buy gold, which has been used as currency for hundreds of years.

"The Fed announcement was a bit of a surprise in the precious metals world," Nichols says. "It was a reflex sell-off from institutional traders who know how to make a profit from such a move."

FIRST TAKE: Fed's decision shows it believes in economy's strength

Gold's sell-off has left a psychological mark on investors, Nichols says. A close below $1,180 on the spot market could trigger another sell-off, before the market stabilizes, he says. "The market will recover, but it could be a good way off," Nichols says.

Frank Holmes, CEO of U.S. Global Investors, says that demand from China and India, where gold is a traditional store of value, has been soft. If Chinese gross domestic product per capita starts to rise, demand for gold should rise as well, he says.

Holmes recommends a 10% stake in gold-mining stocks. If you bought now, you'd be taking profits from the Standard & Poor's 500 index and buying at a historical low in gold stocks, he says.


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