Gold dropped more than 2.5% on Thursday, coming perilously close to the $1,200 per ounce mark. This happened on the heels of a budget deal that may make it easier for the Federal Reserve Bank to taper its $85 billion monthly monetary stimulus program. While that may be negative for gold, there may be other fundamental reasons bullion is falling.
Gold has lost a third of its value in a steady decline that began in September, 2012 – well before any taper talk began.
According to Steve Cortes, founder of Veracruz TJM, gold has two problems: the economic situation outside the United States and the economic situation in the United States.
"All year, gold bugs have been hitting the markets windshield and I think they're going to continue to," says Cortes. "One of the main reasons is China and other emerging markets. Gold is largely an emerging market story because they are the marginal buyer of gold. Those markets have fared incredibly poorly in 2013 and so has gold in turn."
Consumer demand for gold in eastern markets was 2,167 tons in the first nine months of 2013, with more than 1,500 tons bought by China and India alone, according to a report by the World Gold Council. Western demand for gold, including from the US, was 402 tons during that same period.
However, Cortes sees recent drops in the Chinese stock market as a potential headwind for gold. The iShares FTSE/Xinhua China 25 Index tracking ETF (the FXI) is down 5% since Monday's open.
"With that kind of selling in places like China and India in general, I think you're going to continue to see pressure on the gold market," says Cortes.
However, Cortes sees one main reason why he thinks gold won't go up any time soon.
"There's no serious wage growth out there," says Cortes. "Workers are very lucky just to have jobs so they're not willing to pressure and employers aren't willing to grant seriously higher wages. You don't generally get inflation unless you have wages rising and that is just a bad environment then. A tepid wage environment is a bad environment for the yellow metal. "
Jeff Tomasulo, Managing Partner at Belpointe Alternative Investments, believes $1,200 is critical level for gold.
"If it breaks, think we're going to $1,000," says Tomasulo. "I can't see it breaking through $1,000 but, anything is possible."
To see the Tomasulo's charts and the rest of Cortes' fundamental analysis on gold, watch the video above.
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