THE BLOG
05/24/2010 05:49 pm ET | Updated May 25, 2011

Hey, The Bullet-Proof Vest Doesn't Work

Hey, what's up with gold, supposedly the bullet-proof investment when things look like they're going to hell (like now)? Somehow, the script got screwed up. Instead of roaring, gold is crawling, and not only that, it's going backwards to boot.

After tripling since 2001 and steadily ballooning in recent years to an all-time high a couple of weeks ago of $1,250.40 an ounce -- about a 50% jump from its 2007 close of $833 and nearly a 15% gain from last year's wrapup of $1,098.60 -- the yellow metal is starting to tarnish. Last week alone, it dropped $54.40 or 4.4%.

Granted, nothing goes up forever, but the sudden retreat by the investment darling of the flight-to- safety crowd into the $1,100s -- coupled with growing predictions of more erosion ahead -- seems totally out of line, given a slew of gold-buying catalysts. These include:

--Europe's worsening sovereign debt crisis.

--A growing number of forecasts that Greece will default.

--Swelling currency concerns, led by the collapsing Euro.

--French President Sarkozy's threat to pull France out of the Euro.

--Burgeoning money printing world-wide, a sure harbinger of future inflation.

--Fears that the European debt crisis will lead to a faltering global recovery, maybe even a recession.

--Our exploding debt and deficit.

--A warning by former Treasury Secretary Paul O'Neill that the U.S. could go the way of Greece, that "if we don't change course, we could become a basket case ourself."

--Increasing worries about bonds, including long-term U.S. Treasuries.

--An increasingly erratic U.S. stock market, characterized by growing daily triple-digit losses in the Dow Industrials and the recent nasty one-day decline in the Dow of nearly 1,000 points.

Actually, given world-wide financial turmoil and no indication of any let-up in sight, some gold traders think the metal should already be commanding a price tag of around $2,000. But even some bulls see additional weakness, with the metal, currently around $1,192, seen falling over the near term to $1,120 and perhaps even retesting $1,000.

One concern, as a number of gold experts see it, is a worrisome contrary indicator, namely there are way too many bulls. "It's a crowded trade on the upside," says Larry Edelson, who monitors precious metals trends for Weiss Research in Jupiter, Fla. and notes that sentiment readings show 98% of investors are bullish on gold. "Near term, it's putting in a little top, says Edelson, who thinks the metal could drop to the $1,130-$1,150 range.

One reason, he believes, that gold is being negatively impacted short term is stepped-up overseas demand for the U.S. dollar for safety purposes, although Edelson views such buying as tantamount "to jumping from the frying pan into the fire."

Although concerned about the near term outlook for gold, the analyst takes a far more positive view beyond that, arguing that it's surely headed higher. Pointing in particular to the collapsing Euro and growing financial distress in the U.S., Edelson sees gold subsequently rising to $1,500 this year and on to $2,300 in 2011. As another positive for the metal, he notes that gold, before its recent spell of weakness, has been climbing even in the face of a rising greenback. "That's proof positive of a crisis in the fiat currency system," says Edelson.

Taking a longer term view, he thinks gold should be part of every investor's portfolio. His favorite is the physical gold itself, which can be purchased from such well known outfits as Monex; Manfra, Tordello and Brookes, a New York bullion dealer, and Kitco.com., an online dealer. As for individual stocks, he goes for the biggies, notably Barrick Gold., Goldcorp., and Newmont Mining.

A fella who has made some excellent up and down calls on the direction of gold prices -- in fact, he accurately predicted the recent weakness -- is Mark Leibovit, editor of the VR Gold Letter in Sedona, Ariz.

He drew my attention to several recent negative technical signs that suggest gold could continue its recent drop to around $1,060 an ounce, which would be equivalent to an overall retreat of say 15%. which Leibovit contends would represent a buying opportunity. One of those signs was what he calls a reversal pattern, which occurred when gold rose to higher highs during one recent trading session and then reversed to lower lows the following day. Another red flag was the failure of a couple of gold indexes -- the Gold Bugs Index and the Philadelphia Gold Index -- to accompany and confirm the metal's recent rise to record highs.

Leibovit cited the possibility of a strengthening Euro, which could hurt gold, maybe even lead to a retesting of the $1,000 price tag, but he thought a more likely course was the fear that the European debt crisis might expand, leading instead to a higher gold price. In any event, he thinks the wind is at gold's back and views $2,000 or $3,000 as only a matter of time.

He also points out that despite his near-term conerns, gold stil has the wherewithall to rebound sharply at any given moment.

A HuffPost reader in Brisbane, Australia, Cornel Campeanu, a chartist at Techpro.au.Com, e-mailed me with an entirely different scenario. Based on his work, he believes we are a short time away from a meltdown of biblical proportions in mining stocks, with such names as BH Billiton and Rio Tinto leading the charge. As for gold, he sees a potential drop of hundreds of dollars an ounce, preceded by a possible near term drop to $1,120.

Campeanu, it should be duly noted, is spouting contrarian views. Most market pros I talk to overwhelmingly feel that long term, the outlook for gold remains golden.

What do you think? E-mail me at Dandordan@aol.com