What's Behind Gold's Recent Sell-Off?

If you're like many investors, you probably have some gold in your portfolio. With economic uncertainty the norm for the last two years, and with almost non-stop gold commercials on cable TV, chances are you've at least dipped your toe in the gold market.

But since the first of the year, gold prices have been trending downward. Should you be concerned?

On Tuesday of this week, gold prices fell to their lowest point in the last three months. Gold for February delivery fell $12.20 to $1,332.30 an ounce at the Comex division of the New York Mercantile Exchange. Those who recently got into the precious metal may have started to sweat.

Hedge fund dumping?

But many analysts think the recent sell-off can be traced to some large transactions, with a number of hedge funds liquidating their positions for a number of different reasons. Sharon Epperson, who covers commodities for the business news cable channel CNBC wrote this week that there are many reasons to think the recent sell-off won't last.

The reason? The risks of further economic troubles in Europe, which has shored up the dollar in recent weeks, has also sent international investors flocking to gold. Also, China remains a strong buyer of gold. Those two factors could propel gold prices higher in the weeks ahead, according to some analysts.

There's no question that gold has been a good investment for those who got into the market before 2010. Last year the price of gold rose for the tenth consecutive year, reaching a high of $1,405.50 an ounce by the end of December. That's a 29 percent increase from last year's levels.

Uncertainty helps gold

The World Gold Council (WGC) says international investors remained concerned about uncertainty in the macro-economic environment and have turned to gold to hedge against weakness in the U.S. dollar and rising inflation in many economies.

"Gold's relatively low volatility and lack of correlation to many assets has made it an ideal candidate for portfolio diversification and risk management strategies," said Juan Carlos Artigas, the WGC's Investment Research Manager.

In its report for 2010, the WGCl notes that central banks became slight net buyers of gold for the full-year, after two decades as a steady source of supply to the market. It was a part of a trend of more net buyers than sellers, which is what is needed to drive a market higher.

Gold or stocks?

But will the trend continue in 2011? Some analysts think it all has to do with how investors feel about risk. If they are willing to take on more risk, they may find stocks more appealing than gold, especially if they gain confidence about the economy. Inflation fears notwithstanding, they may find stocks more appealing.

Lately, stocks have reaped the benefit. Wednesday, the Dow Jones Industrial Average briefly crossed the 12,000 level for the first time in two and a half years, with the index up more than four percent in January. Gold, meanwhile, is down around five percent from its December high.