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Gold Prices Might Still Drop A Little Soon

Billionaire investor and Berkshire Hathaway, Inc. Chairman Warren Buffett is generally well-liked and respected. Nicknamed the "Oracle of Omaha," his birthplace, this frugal man known for value investing has been quite candid about his take on gold. These days, he is taking every opportunity to bash the precious metal, his latest dismissal taking place in a Fortune magazine article based on his upcoming letter to Berkshire Hathaway shareholders.

Though many experts support the purchase of this metal, it is difficult to take a stand against such a successful investor. Mr. Buffett is not called an oracle for nothing and his bank balance illustrates the number of times his predictions have been correct. However, that does not change the fact that gold prices have been skyrocketing, making gold bugs very happy. This creates a dilemma for anyone thinking about investing in the metal.

Mr. Buffett uses the traditional arguments against gold including the fact that over time, it underperforms stocks. He says the metal is a bubble that has inflated itself and it offers no inherent value to investors. As far back as 1998, he stated that this precious metal had no "utility" and noted that anyone observing from Mars would wonder why the human race was so fascinated with it according to GoldSeek. As he was stating these things in a speech at Harvard, the price of the metal was just $300 per ounce. If he had invested only a million dollars, a pittance for him, he would now have $5.7 million, an annual return over 13 percent.

In his Harvard speech, Mr. Buffett conveyed the impression that it is strange to pay people to guard this metal that comes from the ground. Others believe that it makes sense to protect the golden metal because it is both rare and valuable. Investors safeguard their holdings from theft and the metal protects them from the devaluation of fiat money, banking collapse, and inflation. However, like most other investments, there is risk involved.

Analysts studying the U.S. Dollar Index note a move below the critical resistance line, which should lead to another significant decline. The value of the Index is currently just above the resistance line, which is declining. However, there has not been confirmation of the breakout. From a long-term view, there was no change during the past week because daily movements have not been large enough to be visible from a two-decade standpoint. Though the long-term situation is still a bit unclear, it appears to be leaning toward bearish.

From the short-term vantage point, however, the situation is not as bearish. During recent days, the dollar has been slowly edging higher. Analysts say this trend could continue for a while, as history reveals a pattern during 2010 that is playing out almost identically today. The next local top could be in or may be experienced quite soon. The rally during the past month has not featured a meaningful correction. This indicates that a local top will soon be formed because it is not possible to move higher for an indefinite period without corrections.

The Japanese Nikkei and Dow Jones Industrials have reached key resistance levels, indicating a pause or end to the recent rally within these markets. Within the Broker Dealer Index, which is a proxy for the financial sector, the bullish implications are over the medium, not short, term. Important resistance lines are looming or have been reached in the general stock market, creating a bearish outlook for the short-term. With both short-term drivers in the precious metals sector offering bearish influences, gold is likely to decline, but not very much.

The impact on the rate of silver throughout the world is likely in a similar position. If there's to be a small correction, expect one in a few days.

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