For Gold Prices, Is the Bull Run Over?

After a decade-long bull run in the price of gold, the bears are beginning to come out of hibernation.

That may seem hard to believe after the recent run up in gold's price. With conflict rising in Libya and the crisis still brewing in Japan, the price of gold rose to $1,428 an ounce, up an astonishing 28.8% in the last year. A decade ago, gold was selling for just $268.

"While we do expect inflation to remain a concern, investors who are focused on gold will likely start taking profits and move their money into riskier assets such as equities, which have performed really well in this market," says Brian Bueno, an analyst at research firm IBISWorld, which has just published a report entitled, "Gold's Long Bull Run Is Set to Turn Bear."

Even some noted gold bulls are warning that prices have gone too high and that a major pullback may be in the offing. "Since early this year, I have become cautious about gold's ability to push substantially higher over the near term and have expected instead to see a sharper decline," wrote a commentator on Forbes.com. And investment adviser Mickey Fulp recently told Business Insider that gold is "overdue for a correction," though he remains a long-term bull.

Many American investors have been adding gold to their portfolios because other investments, such as Treasuries, which could always be counted on to produce income, have been such terrible performers in the last few years.

Summertime Could Be Big Turning Point

Bueno says the combination of Libya and Japan are driving investors into safe haven investments, like gold, temporarily, buts says these are short-term phenomena and that he is predicting the gold price to hover around $1,200 an ounce by year end, falling to $1,128 by 2013.

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"We expect the price of gold to suffer major blows starting possibly this summer," he says.

He bases his argument on the belief that investors will prefer riskier assets like stocks to gold because the global economy will be regaining strength in earnest by summer.

Bueno says another key sign of a downtrend is that the amount of new gold bought by exchange traded funds that invest in the precious metal fell by 2% in 2010 and that U.S. demand for gold coins and bars was down by 8%, both indicating a slackening of demand.

Dan Major, a metals analyst at the Royal Bank of Scotland in London, is not as pessimistic about the outlook as IBISWorld is, but he is predicting that the gold price will average $1,350 in 2011, and then drop to $1,300 in 2012, before rebounding to $1,375 the following year.

In his view, gold will become relatively unattractive as rising rates increase the so-called opportunity costs of owning assets such as gold, which don't pay any interest. Opportunity cost is when a competing asset pays a better return, such as a short-term corporate bond or Treasury bill that pays its owner an interest rate.

"Gold and silver have become dependent on sustained inflows from investors, notably in the exchange traded funds," says Major. But maintaining that flow will be difficult to achieve with interest rates headed upward, he adds.

Major says interest in gold jewelry, especially in China and India is relatively robust, but Bueno says that while jewelry accounts for 60% of the market for gold, jewelry demand does not historically correlate with higher gold prices. So even if more people are buying bracelets and necklaces, that doesn't mean the price of gold will continue to rise.