The season of colors which beckoned us to moments of happiness and joy has ended. The season which normally entices us to enjoy while smearing colors or inundating our friends with water has come to a halt, although our friends in the Terai region and our next country neighbors are celebrating the inauspicious day today. While the city cleaners are covering the mess that we inflicted yesterday, yours truly is amazed by the current bearish trend of gold which has thrown an interesting question in mind-Has the Bullish run of gold ended?

Following Fed chairman’s Bernanke’s proclamation to Congress that he doesn’t anticipate another round of QE, the gold prices have backtracked into a southern run not witnessed in the recent memory. The first reason revolves around the Fed and its recent attempts to manipulate the bond markets via two rounds of QE and operation Twist. With last week’s announcement of the ECB lending money to the continents at very attractive rates, will the need for additional US stimulus decline? If the Fed removes the possibility of further QE from their repertoire, this will be negative for gold and the other precious metals in the days ahead.

The second reason revolves around the after effects of manipulating the bond market. By offering such low and unattractive rates, the Fed has successfully weakened the value of the US Dollar. What concerns me is the ECB and now the Australian Central Bank are contemplating and initiating rate cuts and ultra low rate loans to shore up their banking system. We may actually see the USD strengthen in this environment, which would be an additional headwind that gold will be facing.

The third reason is the negativity for gold that would be provided to the US economy via a stronger currency. A weakened dollar had been the primary reason gold and similar commodities have rallied in the last decade. The recent strengthening in the value of the US Dollar would halt the rapid increase in commodity prices and may actually free up money for consumers to use in other areas.

In summary, the bullish case for gold needs to be revisited. If the Fed allows Operation Twist to expire in June without further stimulus and the US Dollar strengthens, we could see gold underperform in the near term. The most likely scenario is for gold to underperform for the next couple of months as the market waits to see the economic outlook for the second half of the year. If growth remains firmly on track, Europe doesn’t recover and the Fed does not initiate a further round of QE, we may actually witness a further weakening in the gold prices in the days ahead.

Note: The blog is just an expression of the author’s opinion and cannot be responsible for any losses incurred.