11/15/2010 01:45 pm ET | Updated May 25, 2011

Gold Running Out Of Steam?

Goldfinger would probably be turning over in his grave if read the headline on this piece. Many live gold bugs, I'm sure, would readily agree.

Actually, on the surface the headline here centering on a potential downturn for gold seems out of touch with reality, what with the yellow metal on a tear -- more than tripling in the past nine years, doubling in the past five years, and masses around the world scooping up more of it with each passing day.

What's more, currency debasement around the globe, the threat of an inflationary outbreak, a falling U.S. dollar, a reversal by the central banks. which have switched from net sellers to net buyers, and continued aggressive purchases by such countries as India, China, Russia and Venezuela all add up to the likelihood of an ongoing gold rush.

Still, nothing ever goes up in a straight line, bubbles always burst and gold, which is already up more than 25 percent this year and recently hit an all-time high of $1,425.50 an ounce, is beginning to show some signs of wear and tear.

Over the past week, for example, reacting to a possible rate boost in China, a rise in long-term interest rates, a strengthening greenback, new highs in credit default swaps in Ireland, Spain and Portugal and a deterioration in short-term trading patterns, gold was struck by a brief wave of profit-taking. In the process, gold went into a mini-tailspin, retreating to about $1,365.

This recent weakness raises some obvious questions: After running the four-minute mile, is gold ready to take a temporary breather? And if so, how much could the price fall over the short run?

One of the sharpest gold minds around, Mark Leibovit, editor of the VR Gold letter in Sedona, Az., doesn't believe the downside has been exhausted over the near term, and thinks a drop to the low to mid $1,200s, say $1,200 to $1,225, is likely the worst case scenario.

"We're in a correction phase and maybe we've hit a top for a while," he says. "We got too euphoric, we've had a good run and we could be due for a pullback, perhaps for a few weeks. For now, gold's in a downtrend and I would be careful."

Still, Leibovit, a skilled market timer who about a week ago issued a sell signal on gold at the $1,400 level to trading-oriented subscribers, says he would not disturb long term gold portfolios and, in fact, would be a gold buyer in the low $1,200s.

Incidentally, shortly after the metal crossed the $1,000 mark in September of 2009, Leibovit told me he thought that gold would never again trade below $1,000. It was an outrageous comment, but Leibovit is sticking to his guns, arguing that gold is in a 20-year up cycle that has another 10 years to run.

"With the dollar dropping, gold is a new global currency," says Leibovit, who insists that the metal will remain in a long term bull market as the world gets tired of 24/7 money printing.

As Leibovit sees it, "gold is only in the third evening" and he looks for the metal to trade at between $1425 and $1,500 in about three months, at $1,700 within the next six to 12 months, and at $2000 to $3,000 in the next several years.

His three favorite gold plays: Central Fund of Canada (CEF), which holds gold and silver bullion, Market Vectors Junior Gold Miners ETF (GDXJ), and Agnico Eagle Mines Ltd. (AEM

In periods of political and economic uncertainty, gold usually thrives. And we've got plenty of that now. observes Jeffrey Nichols, managing director of American Precious Metals Advisors, pointing to the GOP's seizure of control of the House, its narrowing of Democratic control of the Senate and the Federal Reserve's allotment of another large dose of monetary stimulus (its $600 billion quantitative easing package).

Nichols says it re-enforces his bullish case for gold and raises his confidence that his forecast of $2,000 to $3,000 gold in a couple of years will be met.

Speaking of Goldfinger, you've got to feel sorry for the guy. In retrospect, he really didn't have to concoct an ingenious plot to drive up the price of gold by making the U.S. gold supply in Fort Knox radioactive. All he really needed was time and patience to allow the natural forces of greed, risk-taking and out-of-control spending take hold.

This largely refers to many consumers living well beyond their means, big banks rolling dice like those flashy Las Vegas gamblers, skyrocketing government spending, Ben Bernanke acting like a Nascar racing driver to speed up the Federal Reserve's money-printing machinery, a $1.35 trillion budget deficit, and our national debt, now $13.7 trillion, climbing and going through the roof.