Gold Downturn May Be Coming to an End

Gold prices have hit an eight-week low as the dollar rebounded against the euro, hitting $862 an ounce Thursday before setting at around $863.

But prices are poised to rise, according to Sean Corrigan, chief investment strategist at Diapason Commodities Management.

"As the credit crisis reintensifies and we see credit default rates going up and credit spreads widening -  these will be the things that will give gold another leg," Corrigan said.

Gold has done very well out of the turmoil in financial markets in recent months as, like with other commodities, investors switched from financial assets into tangible assets. In March -- the same month Bear Stearns was bailed out -- gold broke the $1000-an-ounce barrier for the first time ever.

But Corrigan said he believes the "temporary renaissance" in the financial markets has spurred investors to go back to traditional financial assets in attempt to bottom fish the banking sector, causing gold prices to suffer.

"We've retracted almost half of the big rally from $650 to $1040-ish that we did see through this credit stress cycle," Corrigan told CNBC Europe.

And following European Central Bank President Jean-Claude Trichet's seemingly doveish stance Thursday -- when he indicated for the first time that growth was a key concern -- the dollar strengthened against the euro. None of this was positive for gold, Corrigan said. 

But Gold will rise again "either when dollar weakens or when central banks come back more aggressively with monetary policy, which will happen sometime before the end of the year," he adde.

"Somewhere around $850 there’s a big technical support level," Corrigan said. "If we break that we could see $800 but down at that level we start to see that marginal gold producers are not going to be making money so presumably if it were to persist there we’d see supply contract and we would certainly see cancellation of investment plans, so somewhere down there is I think somewhere you want to look for a floor.”

For now, investors need to wait for the "constellation of central banks action and renewed credit fears to boil again" before witnessing a move up in the gold price, he added.

© 2008 CNBC.com