[su_note note_color=”#f1fcf5″ text_color=”#000″]The gold price has been in a steady decline since mid-July of this year, when it peaked close to $1,350. Gold closed on Monday September 22nd at $1,212.

“What is going with gold, are there reasons to worry and is this a time to buy or sell?”

This article provides a summary of our view on these three questions. Readers who are looking for an in-depth analysis are recommended to read the extended version.[/su_note]

The Gold Price Declines – Concern, Buying Opportunity, Or Both?

The price chart shows that gold has been trading in two different trading ranges since its all-time high in 2011. Right now, it is trading close to a 4-year bottom, ready to retest the bottom of this range for the third time. From a chart perspective, strength or weakness of an asset is measured by its reaction when testing the third time a trendline, support or resistance area.

Has The Gold Price Drop Run Its Course?

The marker data from the physical gold market worldwide learns that Asian demand for physical gold is still strong. Western investors are not dumping their gold holdings like they did between March and June 2013, as evidenced by the stable amount of gold ETF holdings. Recent gold price weakness is not caused by the physical market.

Gold’s sentiment and technical picture is showing extreme readings. However, sentiment was even more negative at prior price dips (in April, July, December 2013) which suggests that selling pressure is not over yet.

The latest COT reports show that the COMEX futures market in gold is becoming increasingly bullish with a massive decrease in short positions in the commercials category. However, with still a large number of longs in the large speculators category in the current downtrend, there is room for more downside in the gold price in the short run.

A rising US Dollar, coinciding with the end of QE and an expectation of rising interest rates, is putting serious pressure on Dollar gold. The US Dollar index appears to be a key influencer, and the price level to watch is 85; once that level is broken to the upside, one can reasonably expect lower metals prices.

Shorter term, the US Dollar is getting overbought. A relief rally in gold is in the cards. Longer term, it remains doubtful whether central planners will allow a strengthening US Dollar; in a global currency war, a strong currency is not a blessing.

What would happen if the metals were to continue their decline?

One likely scenario is capitulation in the precious metals complex. No matter how painful that would be for gold bulls, it could result in a “wash out bottom” which could result in a trend change and, hence, the continuation of gold’s long term bull market.

Readers looking for specific price levels to monitor should note that the secular gold bull market will still be intact with a gold price in the range of USD 1000 – 1100.

On the other hand, were gold prices to rebound from here, in other words would the third retest of the current trading range appear to be successful, it would suggest the final bottom would be in. The key price level to watch is USD 1180.

Our long term view on gold and silver remains bullish because central planners are strongly committed to continue the global currency war by means of monetary stimulus programs. With their fundamental fear for deflation, central bankers will do “whatever it takes” to create inflation. That is, longer term, undoubtedly a key driver for the metals.

Where does all this leave us, investors?

Even with lower gold prices in the cards, this is not a time to sell physical precious metals holdings. Investors should look to at to their positions if prices would go lower, while still respecting a “normal” balance in their asset diversification. As Jim Rickards noted recently, because we have both inflation and deflation at work currently, one has to make make both bets, meaning investors should hold some inflationary bets and some deflationary bets at the same time. Gold (and silver) will protect purchasing power when inflation picks up, but also during a deflationary bust. A balanced portfolio will take care of returns in the time period between inflation and deflation.

Disclosure: I am long physical gold.