Merrill Lynch predicts gold will pass $2,000 an ounce by year-end.  Yet, it dropped dramatically yesterday, by over $40, and is sitting about $1,570 now.  As it turns out, a large commodity hedge fund had purchased a put at the $1,600 level.  So, rumors spread quickly that they were dumping their gold holdings when the price touched that level, which further depressed the value of gold.

But, what caused the value of gold to dip below $1,600 in the first place?  Yesterday, the Fed released minutes of their last meeting, which indicated serious discussion of ending quantitative easing sooner than expected.  (It is widely believed that quantitative easing tends to weaken the dollar.)  With the release of those minutes, the dollar spiked upwards.  An increasing dollar generally reduces the price of gold, and it did just that yesterday, causing gold to hit $1,600 and the commodity fund to start dumping their gold holdings.

And, that set up yet another problem.  When the 50-day moving-average-price for a stock or anything else crosses below the 200-moving-average, that is called the Death Cross, which signals the price will continue to fall significantly.  When the large commodity fund started dumping their holdings, that pushed the 50-day average below the 200-day average.  Many technical followers of gold will now dump their gold at this point, further depressing the value of gold.

A few months ago, a commodity guru I respect, Jim Rogers, predicted gold would hit $1,550, and that would be the time to “back up the truck.”

Gold is traditionally the ultimate inflation hedge, but I don’t see inflation breaking out significantly for another year or two at the earliest.  Still, the price of gold is getting very shiny and awfully pretty . . . excuse me, I think I’m starting to drool.