Gold has certainly had a lackluster start to 2011, but there are many reasons not to expect the recent slack to last.
Risks of further crises in the euro zone remain high, as well as the risk of a fiscal crisis in Japan and trade war between the U.S. and China, says Capital Economics' chief international economist Julian Jessop. He expects gold prices will rise to $1,600 an ounce by the end of the year—even if investors' appetite for risk starts to fade.
Gold may already be on its way higher. Gold futures ended the floor trading session in New York in positive territory Wednesday for the second straight session. After Tuesday's "bullish reversal", traders say the "hot" money that wanted out of the gold markets has found the exits.
After a huge drop in open interest in Comex gold futures on Monday and steep declines in precious metals ETF holdings earlier this week, open interest has returned and gold prices seem to have found solid footing above near-term support levels.
"We saw indications of massive liquidations and hedge funds getting out, but now it appears that liquidations are complete. I'm looking for gold to resume its prior trend to the upside," says MF Global precious metals analyst Tom Pawlicki, as gold has stayed above $1,317 an ounce, a key technical support level.
Gold priced in euros is another way to look at the recent price move as the "great trade" of 2010 has turned south. That trade was even better bet in 2010 than gold in dollar terms. Gold priced in euros gained 37 percent last year, as traders opted to go long gold and short euros as a way to mitigate U.S. dollar risk.
Yet in the past two weeks, the price of gold has fallen nearly 100 Euros an ounce—an 8.5 percent decline since January 12.
There are indications there too that "the bottom is in" as gold priced in euros bounced off its intraday lows Wednesday, says trader John Netto, president of M3 Capital.
"The unwind contributing to the velocity behind the rally in the Euro and sell off in gold appears to be over, making it a great spot to now go long gold/short Euros after this recent shakeout,” Netto said.