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Gold Prices and the "Grexit" Effect

Lately gold prices have been affected by a strengthening dollar resulting from troubles overseas.

On Tuesday, Greek Prime Minister Lucas Papademos told Dow Jones Newswires that considerations were being made for a potential exit by Greece from the euro. He also warned that such an exit would be "catastrophic" for the country and that fallout across the entire Eurozone would be severe.

Concerns over what will happen to Greece and the Eurozone if Greece leaves have caused the euro to drop to $1.255, its lowest level against the dollar since July 2010.

These issues have led to a rising dollar as investors continue to move out of gold and into the dollar.

"Not surprisingly, Greece is the biggest single factor behind the move [out of gold and into dollars]," said Money Morning Chief Investment Strategist Keith Fitz-Gerald on May 11. "Traders are concerned that the nation will summarily go its own way, shatter the EU's bailout and potentially sink the euro itself."

Constant worries loom of a "Grexit" as European leaders met in an informal summit in Brussels today (Wednesday) to talk about the debt crisis and how best to spur growth in the struggling Eurozone.

The meeting comes a day after the Organization for Economic Cooperation and Development (OECD) issued a warning that the 17 countries that use the euro risk falling into a "severe recession."

"The crisis in the Eurozone remains the single biggest downside risk facing the global outlook," said Pier Carlo Padoan, chief economist for the OECD.

So just how low can gold prices go?

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The Gloss is Coming Off the Eurozone

Europe, Europe, Europe…

I know, you're sick of hearing about problems in the Eurozone.

But the problem with Europe is that it won't go away. And if it does go away, we'll have even bigger problems. What a mess.

Of course, I'm talking about the Euro-currency zone and the European Union, not Europe itself.

I love Europe. I love every country in Europe. I love the different cultures. I love the different languages. I love the different societal models. I love the history of Europe.

And no doubt all the Europeans love all the same things about their Europe – except maybe some of their history.

But even more than loving Europe, Europeans love their own countries. Why? Because they have different cultures, languages, societal models, and differing views of their history. Vive la différence!

So, whose bright idea was it to gloss over (with shiny promises and, later, a shiny new currency) thousands of years of differences and shove all Europeans into a funnel in the hopes that they'd all come out the other end as one homogeneous mass of humanity?

Oh, that would be the bankers and financiers who wanted a United States of Europe so that the free flow of goods and services payable with a common currency would make everyone better off, and make themselves better, better off, by a lot of betters.

And now, what a surprise! There are differences all across Europe about, well, Europe and what it has become and where it has to go to get out of the mess it's created for itself.

How that's going to end is playing out right before our eyes.

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Everything You Need to Know About Gold Prices

Gold's hot. Then it's not. Now what?

Where did the love for the shiny metal go?

Now the gold bugs are crying, and the "I told you so crowd" is warming up in the wings.

After a stunning rally to $1,895/oz., gold prices are down hard, falling below $1,600/oz. That's a 16.11% drop that has the gold bears drooling for more-but probably not for long.

Let's start with gold prices themselves. Right now they're down three months in a row and many gold investors fear there's no bottom in sight.

What they don't realize is that the fall in gold prices is as rare as proverbial hen's teeth. This is the first time we've seen gold prices tumble three months in a row since March of 2001.

In fact, since 1957 we've only seen gold prices fall three months in a row 65 times out of a total of 661 three-month periods, according to data compiled by Bloomberg and Standard and Poor's.

But here's the thing about gold prices…

Gold could fall all the way through May, turning what it already a rare occurrence into an ultra-rare occurrence.

Would that be a bad thing? In the bigger scheme of things, not really.

People forget that gold prices fell by more than half from 1975 to 1976, and were down 17 out of 24 months. At the same time, gold prices also recorded 10 three-month declines during the period.

That was, incidentally, right before gold rose 721.25% to $850.00/oz.– a peak gold hit on January 21, 1980.

The point is, bear tracks always precede bull market runs. So I am not especially concerned by this pullback in gold.

In fact, as you can see from an earlier forecast, we're right on target with my expectations for gold this year.

Take a look at what I shared with my readers on January 2, 2012:

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Gold Prices to Break $2,000: Here's How You Can Profit

Gold prices are still far from last year's record $1,920.30 an ounce.

Given the economic volatility in 2011, last year was a banner year for gold prices. Fears of global market turmoil helped push the yellow metal to record highs.

While the long-term bullish outlook for gold remains, short-term pressures have halted its steady climb.

"Gold has found more support recently, but it doesn't have all of the catalysts in place to be driven substantially higher yet," Suki Cooper, an analyst at Barclays Capital, told Reuters.

Here's why this dip isn't the start of a bearish gold year. Instead, it's a chance to stock up before gold prices head to $2,000 an ounce. (Want to know the best way to profit from soaring gold prices this year? Take a look at our latest special report today. It shows you how to get daily market information and specific recommendations in gold… silver… penny stocks… Asia… and biotech, to name just a few. Find the report right here.)

The Fed, India, and Gold Prices

For the next three months, the U.S. Federal Reserve is focused on a stabilizing U.S. economy and low inflation. In fact, the Fed's most recent forecast cooled talk of more monetary stimulus (or "quantitative easing").

The Fed expects U.S. economic growth to progress at a steady pace throughout the quarter. With moderate expansion rather than rapid growth or deflation, there's no need to curb borrowing, and Federal Reserve Chairman Ben Bernanke plans to keep interest rates near zero.

This bodes well for the U.S. dollar, and what's good for the dollar is often bad for gold prices.

It's no secret that a weakened dollar sends investors running to the real value of hard commodities. A stronger dollar does the inverse: It causes the big investors to be less cautious with regard to investments in liquid capital, creating a dip in gold prices.

Lagging Indian imports have also contributed to lower gold prices at the beginning of this quarter…

The Case for Higher Gold Prices

Gold prices had gold bugs giddy in the fall of 2011. In September, the luminous yellow metal touched an intraday high of $1,920 a troy ounce, putting the precious metal up roughly 35% for the year.

At the time it seemed like investors, traders and even the guy at the corner store were all buying, hoarding, and lusting for gold.

But the stellar gains were short lived, and by the end of the year gold prices had fallen by nearly 20%.

Part of the striking decline in gold was due to the fact that the "smart" money that had once been amongst gold's biggest cheerleaders, sold it.

Some booked profits, some sold it to reflect gains in portfolios, others were forced to sell to meet margin requirements, and others wanted to start the New Year with a clean slate.

Gold Prices in 2012

Enter 2012, and gold prices enjoyed a lustrous January, rising some 10%, helped in particular by Chinese New Year celebrations.

Gold has since languished as investors became more willing to take on added risk, delving more into equities. While gold prices foundered, the Dow rose 8% in the first quarter, the S&P 500 gained 12%, and the Nasdaq enjoyed a nearly 19% gain.

And more recently, not even gold's best friend, Federal Reserve Chairman Ben Bernanke, offered up much help.

Following the commencement of the two-day FOMC meeting last week, gold experienced a volatile day, but managed to end virtually flat from the previous trading session. The Fed left interest rates steady and extinguished hopes for immediate further monetary loosening measures.

Without a promise of more quantitative easing, long gold holders headed for the exits.

Nonetheless, many sophisticated gold traders are poised to pounce on gold with every dip.

Among them is the storied and accomplished commodities investor Jim Rogers.

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Why Gold Prices Should Thrive

Last week was a challenging one for gold investors. Gold prices have been on the downside.

Although the yellow metal has been on a spectacular 11-year bull run, recent strength in the economy has some thinking gold's heyday is over.

As I often say, investing, like life, is about managing expectations-even throughout gold's decade-long rise, price action over the short term can go both ways.

It helps to look at what happens after short-term drops.

For example, looking at the past decade of one-day 5% declines in gold, you can see that this event is pretty rare.

In 2006, gold dropped more than 5% in a day only two times. In 2008, there were three such events.

Another one occurred at the end of this February. Take a look:
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Physical Gold and Silver Dividends Offer Investors the Best of Both Worlds

What if I told you there was a company that paid its shareholders in physical gold?

Would a "golden dividend" be enough to get you interested in gold stocks?

If not gold, what about silver?

Neither one of these options even existed when I first started talking about them just three months ago.

But thanks in part to billionaire resource investor Eric Sprott, today's investors can benefit from a dividend payable in physical gold or silver.

Sprott had sent a letter to silver producers, suggesting they reinvest some 25% of their earnings back into silver, rather than in cash at the bank.

That took my earlier discussion about gold and silver dividends to a totally new level: dividends in kind.

These aren't paper profits, but real, hold-in-your-hand gold and silver dividends.

For precious metals investors, these "hard asset" dividends make perfect sense.

Today, one innovative gold and silver producer offers investors the best of both worlds.

Finally: Physical Gold and Silver Dividends

In a bid to gain the "first mover" advantage, Gold Resource Corp. (NYSEAmex: GORO), a low-cost gold producer, is launching a gold and silver dividend program on April 10, 2012.

The company has already paid out $41 million in dividends to its shareholders over the past year and a half.

But now they are offering shareholders a unique option by partnering with Gold Bullion International (GBI). GBI is a New York-based precious metals provider to individual and institutional investors, with storage vaults in New York, Salt Lake City, London, Zurich, Singapore, and Australia.

Essentially, GORO shareholders can elect to convert their cash dividends into Gold Resource Corp. "Double Eagles" consisting of one ounce 0.999 fine gold and/or one ounce 0.999 fine silver rounds.

These "Double Eagles" will be drawn from GORO's physical treasury and placed into the shareholder's "individual bullion account" with GBI.

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How to Trade Gold with ETFs and Options

With few exceptions, most leading financial gurus agree that every portfolio should include some physical gold.

But while the yellow metal itself is great as a long-term hedge against turmoil and inflation, it's a lousy trading vehicle.

Here's why.

For shorter-term trading purposes, most gold investors look first to the futures markets, generally focusing on either the CME Group's full-size COMEX contract, which represents 100 ounces of the metal, currently valued around $165,000, or its little brother, the 50-ounce miNY gold future.

However, that can be a fairly costly proposition, with initial margin requirements on a single 100-ounce contract running in excess of $10,000.

And, as anyone who has held those contracts in recent weeks can attest, it can also be an extremely risky one.

For example, the single-day loss on a 50-ounce miNY future on Feb. 29 was $3,845, with the intraday trading range topping $5,200.

Similarly, last Wednesday's one-day decline of $51.30 an ounce in the price of the full-size April future would have cost traders on the wrong side of the move a whopping $5,130.

Even recent intraday moves have been scary.

On March 9, April gold futures plunged $27.70 an ounce shortly after the open, only to rebound and trade as much as $39.50 an ounce higher later in the day.

That swing had a total value of $6,720 – in a single 5-hour and 10-minute trading period!

So, if those numbers give you pause, but you'd still like to mine for profits in the gold market, what can you do?

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The Bernanke Effect on Gold Prices, Silver Prices Means Time to Buy Metals

Gold prices hit a two-month low Wednesday after the Federal Reserve indicated no new stimulus measures would be issued, and silver prices slumped to a seven-week low.

The metals fell after the Fed, led by Chairman Ben Bernanke, announced a positive outlook on the U.S. economy. The Fed reaffirmed it would hold interest rates near zero through 2014, and failed to mention any more means of stimulus.

Without more Fed steps to stimulate growth, and with more positive U.S. economic data, investors expect the dollar to strengthen which puts downward pressure on gold and silver prices.

But the long-term outlook for gold and silver is the same, and investors should instead take the Bernanke Effect as a key time to buy metals.

"This should be treated as an opportunity to buy, or if you already own but feel you don't own enough, to accumulate," said Money Morning commodities and mining expert Peter Krauth. "These two precious metals remain in a secular bull market and are integral to every investor's portfolio."

The Bernanke Effect on Gold Prices, Silver Prices

After Tuesday's Fed announcement, gold for April delivery fell $51.30, or 3%, to finish at $1,642.90 an ounce. May silver slumped $1.40, or 4.2%, to $32.18 an ounce.

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How This Indian Wedding Tradition Drives Global Gold Demand

An Indian wedding tradition dating back thousands of years is more than a simple cultural practice – it has become one of the biggest drivers of global gold demand.

In a Feb. 12 CBS News' "60 Minutes" report, correspondent Bryon Pitts took a look at how the Indian wedding tradition of draping the bride in gold jewels has propelled India to be the biggest source of global gold demand. India is now No. 1 in gold consumption of jewelry as well as physical bars and coins.

India accounts for about 32% of the global gold market with half of the gold Indians buy spent on jewelry for the 10 million weddings held there each year.

As a result, gold prices typically rise ahead of wedding season as families prepare.

"The demand for gold out of India is fundamental for the health of the industry," Ajay Mitra of the World Gold Council told Pitts. "If India sneezes, the gold industry will catch a cold."

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