This Precious Metal Looks Dull

 | Dec 12, 2011 | 3:01 PM EST  | Comments
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Stock quotes in this article:

gld

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db

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DZZ

This column originally appeared on ETF Profits.

Markets continue to worry and digest the results of the eighth European summit held last Friday. At first, it appeared that traders felt a sigh of relief that 26 of the 27 members committed to adhere to tougher fiscal policies going forward. However, with the rating agency Moody's warning that it will review the sovereign debt ratings of the member states after failing to deliver "decisive policy measures" to fix the debt problems of Europe, markets are back down again today.

Stocks are still stuck in a trading range and seesawing back and forth on a daily basis. It's important for investors to look for confirmation from other sectors as clues to what may really be happening in the market. Commodities are falling hard this morning, and, gold, in particular is breaking down from a three and a half month consolidation pattern.

On a fundamental basis, gold has traded up for two reasons. During the last several years, the U.S. dollar has been in a primary downtrend. The dollar is the world's reserve currency, therefore everything is priced in dollars. As the value of the dollar fell, the price of gold, which traded inversely to the dollar, climbed in a steady ascent.

With the European countries in disarray about how to deal with their debt crisis, the strength of the euro as a currency going forward is being questioned by many investors. On a relative basis, the U.S. economy is demonstrating strength, as European leaders struggle with debt and austerity measures that will most likely slow their economies even further.

Second, gold acts as a hedge against inflation. If the European economies start to fall back into a recession, as they appear to be doing, gold will most likely decline as inflation fears subside. In addition, there has been a lot of chatter about China as another major economy that is dealing with a slowdown.

Some European banks are engaged in gold leasing to help create some much-needed liquidity. Rumors have even surfaced that some central banks are actively selling gold.

The combination of slowing global growth, increased leasing and the potential selling of gold by major banks, and renewed strength in the dollar are some of the reasons that gold may continue to go lower from here. Technically, the price of gold has already broken down, and gold could target around $1430 per ounce based on its technical factors. The bottom line is that today it is better to be short gold rather than long.

The PowerShares Deutsche Bank Gold Double Short ETN (DZZ) is an exchange traded note that was created to give investors a cost-effective and convenient way to take a 2x leveraged short position against the price of gold. Futures contracts are used to achieve results. Investors who choose this would be dependent on the credit quality and paying ability of Deutsche Bank (DB), as these are notes of that institution.

Trading at $4.91, DZZ gapped up this morning breaking above a five-month downtrend. DZZ will face resistance at its 200-day moving average at $5.90, but it could go above $7 per share if this European crisis pulls other countries into a protracted decline. Use $4.40 as a stop loss for protection.

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