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Why the rally in gold could be short lived

Talking Numbers

Things sure have changed for gold investors in 2014.
This year, the yellow metal is up 8% versus a slightly down stock market as investors fled to the yellow metal on global market fears. While the Fed’s plan to taper its bond-buying stimulus would be considered a reason to sell gold, worries overseas trumped any decelerated inflationary expectations.

That’s a far cry from last year. Investing in gold at the start of 2013 meant you not only missed a phenomenal bull market, you also got crushed. The equity benchmark S&P 500 index was up 29% in 2013 while gold was down nearly 28%. 

But, will the reversal of fortunes last?

(Watch: 'Probably too late' to buy US stocks: Marc Faber)

According to Steven Pytlar, Chief Equity Strategist at Prime Executions, there’s a limit to how much higher gold can get based on the technicals.

“I wouldn’t say that the charts are telling us a bull run could be sustained,” says Pytlar.

Two major levels Pytlar is watching are $1,365 per ounce and $1,420 per ounce, where he expects a lot of selling if that level gets reached. However, in the near-term, he can see gold work its way to those levels because the price is currently above its 10-day moving average.

“It can move up a little bit higher in the near-term just because the relationship with the 10-day moving average has changed,” says Pytlar. “On a technical basis, we saw over the last half of 2013 the price of gold was in major decline. Every time it touched the 10-day moving average, it would fall. There was just constant selling.”

That changed with the start of the new year. “We started to see buyers coming in on tests of the 10-day moving average and prices moved higher,” says Pytlar.

However, gold investors hoping this will continue will be disappointed, according to Pytlar.

“The longer-term trends are still quite negative,” says Pytlar. “Expect gold to rollover once again once it reaches those resistance levels.”

(Read: Gold falls back after rally, still within view of 3-1/2 month peak)

John Stephenson, portfolio manager at First Asset Investment Management and author of “The Little Book of Commodity Investing”, agrees with Pytlar’s long-term negative view.

“Gold is going down,” says Stephenson. “There’s no question about in my mind.”

While Stephenson notes the People's Bank of China purchased over 622 tons of gold last year, assets under management for gold exchange-traded funds were down.

“Long-term retail buyers are abandoning the gold story,” says Stephenson. “Inflation is non-existent. [If] you pull up a chart of M3 (a measure of money supply), the monetary basis really hasn’t expanded all that much in the US. So, you’re not looking at currency debasement, which is another argument.”

“It offers no yield,” says Stephenson. “There’s a huge opportunity cost for sitting on a gold position. Even if you don’t get any growth at all in earnings on the S&P [500], you’ve got a dividend yield and buybacks [that] account for roughly 4.4% return this year. So, that’s your base case when you compare it to gold. And, I think gold, unfortunately, doesn’t stack up.”

To see the rest of the discussion on gold with Pytlar on the technicals and Stephenson on the fundamentals, watch the video above.