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Is gold losing its luster?

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Investors buy gold for a lot of reasons. One of the most popular reasons to hold gold is that it tends to be very defensive during periods of economic uncertainty. For example, gold is one of the few asset classes that is still priced pretty much where it was before the market panics of the last 14 months.

However, I think gold bugs had better beware because trading volume in gold is dropping fast. For example, a popular way to buy gold is through the SPDR Gold Trust ETF (NYSE:GLD), which has dropped from average volume of 25 million shares a day during the liquidity crisis to 5 million shares a day this week. The SPDR Gold Trust ETF buys gold bullion and then sells shares to investors as a stock.

If you are interested in learning more about investing in commodity ETFs click here.
From a technical analysis perspective, this drop in volume is happening while the stock is consolidating in a fairly tight trading range. This is a classic situation that occurs before a price breakout. In my opinion, there is a real risk that breakout will be to the downside as things improve in the U.S. economy.

There are a lot of traders holding gold investments right now and a decline in prices could lead to a feedback cycle of these investors dumping their shares as prices drop past stop losses. Gold prices are known for sudden and dramatic shifts in price, so this is definitely a situation that traders will want to be very careful.

John Jagerson is a co-founder of Learning Markets, LLC. Learning Markets offers daily articles, videos and investing guides about everything from investing in stocks and options to trading currencies in the forex market and more.

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Last updated: August 21, 2009: 03:37 PM

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