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Gold drops after longest rally since 2011

Gold prices may stabilize in the next six months after recent losses preceded by a run of weekly gains, commodities experts say.

Gold futures for December delivery rose 0.4 percent on July 21 to $1,315.70 an ounce on the Comex in New York, according to Bloomberg. Gold prices dropped 2 percent the week prior after its longest rally since August 2011.

Gold has gained 9.3 percent this year, but the rally is set to reverse as the economy improves and the Federal Reserve increases interest rates, according to a World Bank report.

"Gains in gold over the course of this year have reflected some profit-taking of short positions by speculators, an increase in geopolitical risk premia due to the Russia-Ukraine conflict and the conflict in Iraq, and rising fear of weaker U.S. economic growth due to the 'Polar Vortex,’” Robert Haworth, senior investment strategist at U.S. Bank Wealth Management, wrote in an email. “Recent declines have reflected the nearing end to Fed tapering and anticipated increases in short-term rates and improving U.S. economic data."

James Hamilton, an economics professor at UC San Diego, said there was misplaced concern about the inflationary potential of the quantitative easing policies in the United States, the European Central Bank and the Bank of England, which could have caused a move to gold and silver.

Gold is viewed as an asset immune to inflation and becomes more attractive when inflation expectations are high.

Hamilton said those inflation concerns were misplaced as data on inflation continued to come in lower than expectations.

“We’ll see some adjustment in precious metals just due to recognition of reality,” Hamilton said.

Hamilton said gold prices are difficult to predict, but stability may be expected due to steady interest rates and little concern of inflation.

Potential for unsettling news in international fronts such as in Russian and Ukraine, and Iraq, Syria and China could be bullish for gold, Hamilton said, adding that he’s optimistic that a stable point will be reached.

Haworth said gold fundamentals are negative over the next six months.

“Improving global economic growth and the removal of Federal Reserve monetary accommodation will pressure prices,” Haworth wrote in an email. “Geopolitical conflict will be a risk for rising prices, such as further flare-ups of conflict in Iraq; however, potential price increases on this type of news are likely to be modest and short-lived. If our economic growth forecast is too optimistic, we could also see a rally in gold prices.”

Haworth said he believes that the Fed is likely to increase short-term rates as soon as the second quarter of 2015 and that he anticipates 3 percent average growth in the United States over the last half of 2014.

Hamilton said he doesn’t recommend gold as a major asset class because it doesn’t produce anything or pay dividends.

“People who buy it are betting on bad news and they are betting on worries of inflation,” Hamilton said. “I think that is misguided. They’re betting on political instability in the world. … [Gold] only makes sense as a small portion of overall investments, basically as a hedge against bad news of a certain type, as opposed to a primary way to get rich.”

Haworth said U.S. Bank (NYSE:USB) typically recommends investors hold 3 to 5 percent of their portfolio in commodities, and believes investors should hold a modest allocation -- anywhere from 2 to 10 percent -- to gold as part of a well-diversified commodity allocation.

These recommendations vary depending on the investor’s needs and goals and the investment risk tolerance, he said.

Silver typically follows the same trend as gold, Haworth said, but is more volatile due to its smaller dollar value.

Silver for September delivery rose 0.5 percent on July 21 to $20.99 an ounce in New York, according to Bloomberg. The price of silver has risen 10 percent since the end of May, more than double the gains in gold, bonds and stocks.

While gold tends to be a hedge against inflation and political instability, Hamilton said silver, an industrial metal, is affected by a decrease in demand in a weak economy.

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