Gold dropped by $60 in the last two days. It dropped by $50 and silver by 5% just today. What could explain this out-of the ordinary plunge? There is more than one reason that explains this move.

1. Large amounts of gold and silver have been bought by precious metals traders and hedge funds managers. These amounts are not bought for making jewelry but to be used in making fast profit. The financial managers are participating in building a bubble in precious metals over time. The accumulation of gold and silver by the hot hands makes those metals very vulnerable to changes in sentiments in the markets. Those financial players always have their fingers on the trigger because holding gold as an opportunity as being held with no returns..

2. Bond yields are rising and they are rising in the United States faster than in Europe. The 10-month T notes rate is 3.241% today, a six-month high after today's Treasury’s' action. The rise in US yields partially reflects an economy that is steadily improving, albeit at a slow rate. Dr, copper which is known for predicting the economy went up today, boding off better economic fundamentals in the near future. The rebound in the yield seems also to reflect  higher inflationary expectations perhaps due to QE2. Consequently, the dollar is at a four-month high today. I expect the bond yields to be the major topic for 2010,  The bond’s Move Index, which stands like the VIX index for the stock market, should be watched in the coming year.  This index has not moved up yet but any upturn move in this index may imply that inflation expectations are forming up. Bond yields incorporate inflation expectations as one of their major moving components.

3. The bond yields have also been impacted by the credit crisis in Europe. But the crisis shows some signs of numbness for now but the yield continues to march up. The credit risk quietness anesthetized the fear premium for now, increasing the appetite for more risk and lowering the flight to safe havens like the risk-free T securities and gold.

4. There are also those who contribute the yield rise to China's ongoing restrictive monetary policy that is combating rising inflationary expectations. This camp is of the opinion that the Chinese economy is slowing which does not bode off well for the demand for commodities including gold.

5. Some analysts attribute the increase in the bond rates to the tax cut compromise between the White House and the Republicans. They view it in two different ways. In one way, they see it as a policy that will worsen the fiscal deficit, and in another  as a stimulative policy. In both cases, Treasurys'  yields should go up

6. From a technical point of view, gold has reached a double top at $1425 and $1427 which is usually bearish. Double top  is an  M-chart pattern with two swing highs very close in price. There are a few requirements to classify a chart pattern as a double top including two peaks that are near equal in price and volume decreases on the second top, Double tops have an enormous amount of "cause" or breakout or breakdown potential as the price of the asset has moved back in forth within a defined range. So, when the asset finally breaks out, there is an expansion in volume and price movement. Breakouts can occur to both the upside and downside. If you enter a breakout of a double top chart pattern, you will want to keep a close stop above/below the support and resistance level. The fact the gold price has dropped may imply that this yellow metal has broken a support level ($1385) and its shine has dimmed at least temporarily. But I leave this point for the market technicians to comment on further, as I am a fundamentalist.

Now as the US 10-year interest rate continues to go up (up from 2.4% before the announcement of QE2 to about 3.25 % now), gold price will head down. The sequence should have this pattern: The dollar should appreciate first and gold would move down. Then other commodities will move in the footsteps of the gold. Oil has a change of mind.

I must emphasize that this post is pertinent to the very short-run and I wish to refer the reader to point # 1 above to see the impact of a sudden change in sentiment. A positive change in sentiment could suddenly move gold price significantly higher. There are those who believe that gold price could climb to $1750 in 2011/2012.  This time frame is pertinent to the long run.

Please do not trade on my analysis! Again, I am an economist!

[1] for double top please see the link: http://www.mysmp.com/technical-analysis/double-top.html

[2] For double bottom, see the following like:

http://www.mysmp.com/technical-analysis/double-bottom.html