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The price of gold fell around 2.5% Monday. How can this be happening during a time of such economic uncertainty? Isn’t gold supposed to be a safe haven? The answers are complicated.

Gold is being challenged of late by the U.S. dollar for safe haven investor assets during the ups and downs of the EU crisis. The U.S. dollar’s strength is by definition gold’s weakness as gold is denominated in dollars. Monday the dollar was rising as fears elevated about the Euro, and thus gold was down around 3%. The dollar’s strength also hurts the buying power of large gold consuming nations like India by weakening the purchasing power of the rupee. Here’s a one month performance chart of gold and the U.S. dollar’s performance relative to developed currencies. Gold is represented by the largest gold ETF, GLD , and the dollar is represented by the PowerShares DB U.S. Dollar Index Bullish ETF, (NYSEARCA:UUP), which tracks the performance of the dollar versus various developed currencies.

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Also contributing to gold’s recent downturn has ironically been its positive return this year – around 20% at the beginning of Monday’s trading day. Investors in gold are taking profits from this investment in order to raise cash or reallocate their portfolio in a year with many losing positions. Second, gold’s performance has attracted those who chase best performing investments. These investors are notorious for pushing up valuations but also exiting as soon as expectations are not met. Gold’s backseat to the dollar recently has likely caused outflows by this impulsive group.

Some believe gold could retest $1600 and if so go considerably lower than this support level. Others believe this is a short term shakeout that will eventually lead to gold’s run at the all time high price of $1923 in early 2012. Whatever the case, like any type of investment, gold is subject to short term market moves that are hard to make sense of. As a wise investor once said, “It’s not about timing the markets, it’s about time in the markets.” For those invested in gold over the last ten years who have experienced a 500% gain in their position, that quote must ring true.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Explaining Gold's Manic Monday