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Has Gold Entered a Long Term Bear Market?

SeongJoon Cho | Bloomberg | Getty Images

Gold, which is trading at its lowest level in nearly 3 years, is in the midst of a long term bear market, and investors should look for an opportunity to exit positions in the precious metal, experts told CNBC.

"It's a long term bear market. If you bought into it today, don't expect it's going to do much. And if you own some and get a rally, get rid of it," said Dennis Gartman, editor of The Gartman Letter, a daily commentary on financial markets.

The precious metal plunged 4 percent late Wednesday, trading as low as $1,221.80 an ounce, as the rally in U.S. equities dampened demand for bullion as protection against economic uncertainty. Gold has fallen 23 percent in the second quarter and is currently on track for a record quarterly loss.

(Read More: Gartman: Three Reasons Why Gold Is Going Lower)

Yoni Jacobs, chief investment strategist at Chart Prophet Capital, an equity investment fund, says if the precious metal breaks through the $1,200 level, which is the next key support level and regarded as the production cost of gold, it could fall to $1,000.

"We're either going to find support at $1,200 or $1,000, at which point a lot of the bulls will be reinvigorated to buy gold. When that happens people will make a few bucks, but ultimately it will collapse," said Jacobs, who is also the author of Gold Bubble: Profiting From Gold's Impending Collapse.

"Gold is going to $700 in 3-5 years. The last gold bear market lasted 19 years. Such a thing is not out of the question," he added, referring to the long-term downtrend in gold prices from 1980-1999.

(Read More: $1,000 an Ounce? Gold's Decline Is Feeding on Itself)

The global inflationary environment will play a part in determining the length of the bear market, he said. The world's two largest economies, the U.S. and China, are currently facing downward price pressures.

Jacobs noted that sentiment towards the yellow metal has taken a severe beating with what he deems as the bursting of the gold bubble.

"Seeing the panic and devastation in gold, some say gold will probably never be as popular as it was in last 2 years," he said.

(Read More: Gold Bears Out in Force After Fed)

Reflecting this bearish sentiment, Societe Generale last week downgraded its fourth quarter forecast for gold prices this year to $1,200 an ounce from $1,375, citing a "paradigm shift" in investor attitude towards gold resulting from the recent dramatic sell-off in April and the prospect of the U.S. Federal Reserve tapering its bond buying program later this year.

Swiss investment bank UBS also slashed its 12-month gold forecast to $1,050 from $1,750, warning that gold's appeal as an inflation hedge is at risk of becoming "obsolete" on Fed tapering plans.

Look at Gold's History

In order to determine the floor for gold, historical charts could provide a good indication, said Jacobs of Chart Prophet Capital.

According to Jacobs, the current gold bubble that began to inflate in 1999 is actually part of a larger bubble that started in 1968. Prices rose from $250 in 1999 to over $1,900 an ounce in 2011 - a 600 percent gain.

He has identified $700 as target for gold based on long term historical average prices and previous support levels. $680 is the low hit in 2008 during the global financial crisis.

Jacobs said the production cost of gold is unlikely to provide major support over the longer term, because miners can adjust this cost.

"Two-three years ago the production cost of gold was cited at $600-700 an ounce. If no one wants gold, the cost of mining will be lower, because there will be less interest in the space, less competition," he said.

(Read More: UBS Says QE's End May Render Gold 'Obsolete')

What About Physical Buying?

Some strategists say physical buying out of the world's two largest gold consumers India and China will not be enough to counter institutional selling.

India, has taken several steps in recent months to temper demand for the precious metal including raising an import duty to 8 percent from 6 percent earlier in June.

Gold imports into Asia's third largest economy are forecast to fall by more than half in the July to September quarter from the April to June period, according to local media reports that cited the Bombay Bullion Association.

By CNBC's Ansuya Harjani

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