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What to Make of Falling Gold Prices

Rob Silverblatt

Gold is continuing to lose its luster.

Last fall, gold was trading at nearly $1,800 per ounce. Last week, its price dipped below $1,400 per ounce. And as prices fall, a number of high-profile investors have moved toward the exits.

Notably, in the first quarter of 2013, billionaire George Soros cut his position in the exchange-traded fund SPDR Gold Trust by 12 percent, according to government filings. Meanwhile, in a recent Credit Suisse investor survey, 60 percent of investors said gold bullion is the commodity about which they are the most pessimistic.

[Read: What's Next for Gold Prices?]

For investors who currently have positions in gold, the recent slide creates a dilemma: Sell now and avoid the risk of a further decrease or wait it out and hope for a rebound?

On the one hand, some believe prices still have quite a bit of room to drop. Morningstar, for instance, believes the long-term value of gold, measured in today's dollars, is $1,100 per ounce. At the same time, though, there are other scenarios - most notably a break in the stock market's rally or a weakening of the U.S. dollar - under which gold prices could make up lost ground.

Michael Gayed, the chief investment strategist at Pension Partners, says investors who currently have positions in gold should consider waiting things out for the time being, particularly because they may have already missed the chance to cut their losses. "You can make the argument that a lot of the decline is already over. It may simply be a situation of stay put," he says. "You may have missed the opportunity to sell hard."

[Read: Are You Holding the Right Kind of Gold?]

For those who aren't invested in gold, Gayed cautions against trying to opportunistically time the market by trying to guess when gold will bottom out and buying at that moment. "When you have such movements and volatility, there is a temptation to want to catch a falling knife," he says. "That, to me, reeks of a bad move because you are trying to time [an investment] that is in something of a free fall."

According to Gayed, the main driver of gold's prices in the coming months will be the Federal Reserve. In particular, gold investors are waiting for signs on whether the Fed will continue its bond-purchasing initiative known as quantitative easing.

"In the event that the Fed does not do any pulling away from [quantitative easing] ... then I think you could have quite a large rebound" in gold prices, Gayed says. "Any kind of bet on gold ... is, in effect, a bet on [whether the Fed does] something differently."

[Read: Low Interest Rates Support Higher Gold Price.]

Morningstar's Elizabeth Collins predicts that in the short term, "gold prices are likely to be volatile." As recently as last year, investors flocked to gold. However, "people have become less enamored with gold as an investment in recent months," Collins notes.

Although falling gold prices are bad for gold investors, they are good for at least one class of Americans: jewelry purchasers. Collins notes that lower gold prices typically result in an increase in jewelry buying.

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