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Gold bulls beware: 'More pain coming' before the metal finds a bottom

Aaron Task
Editor in Chief

Updated from 11:28 a.m. EST

Friday's rally in gold is looking like a dead cat bounce. The precious metal couldn't build on Friday's gains, falling $10.00 to $1,159.80 an ounce Monday, as speculators continue to flee from commodities generally and precious metals specifically.

Net-long position in New York futures and options fell 36% for the week ended Nov. 4 as long holdings fell the most in almost two years, Bloomberg reports, citing U.S. Commodity Futures Trading Commission data.

The good news for gold bulls is that gold has gone from being dismissed in the early 2000s to beloved in the late aughts to becoming loathed today, meaning the metal is probably getting close to a bottom. The bad news is that when a bubble pops, it takes a long time for investors to come back in earnest and it's increasingly looking like gold was in a bubble a few years ago when "everybody" believed you had to own the metal after it rallied from below $250 in 2000 to over $1900 in 2011.

Not long ago, the airways were filled with pundits and populists like Glenn Beck and Peter Schiff, who predicted runaway inflation and the dollar's demise due to the Federal Reserve's aggressive response to the financial crisis. Of course, the opposite happened: the dollar turned out to be the ultimate "safe haven" asset in times of financial distress and inflation fears have given way to concerns about deflation both in the U.S. and Europe even as Japan continues its multi-decade struggle with a persistent lack of inflation. Meanwhile, Chinese inflation is at a 5-year low and Moody's predicts "lower global growth for longer" in its latest quarterly outlook, joining a chorus of forecasters predicting lackluster global growth for the foreseeable future.

The good news for gold investors is that gold did suffer a 50% decline during its bull market in the 1970s. The bad news is a 50% drop from the 2011 peak would bring the metal down to $960, roughly 17% below current levels. Typically, bear markets don't end until the diehards capitulate and there's no evidence that's occurred yet.

"Make no mistake, there is likely more pain coming to the gold market before the final capitulation is turned in, and the plunge from the highs (around $1,900 per ounce) has to be taken into the context of the parabolic move from the secular lows ($250 per ounce)," writes Gluskin Scheff chief economist and strategist David Rosenberg, who predicts " sub-$900" gold based on "a classic 61.8%" Fibonacci reversal.

In sum, expect more 'dead cat bounces' ahead in the metal's road to lower prices which should keep the pressure on mining stocks which have dramatically underformed the metal in recent years. The Market Vectors Gold Miners ETF (GDX) tumbling 6.3% Monday, led by a 6.7% drop in Barrick Gold (ABX) amid negative comments from Deutsche Bank.

Aaron Task is Editor-in-Chief of Yahoo Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com.