There’s been a lot of focus on the gold market lately. The yellow metal has started to lose its value, wiping out profits for investors who have jumped on the bandwagon in recent months. 

Yet in this instance, a pullback doesn’t spell opportunity. Few positive catalysts exist to move gold prices back up to recent peaks. In fact, investors should look for signs that may take gold back to where it stood in 2010 or even 2009.

 

As the chart above shows, gold has reached a key technical support. The metal has had an impressive two year-run: any near-term pullbacks were met with fresh waves of buying, creating higher lows and higher highs along the way. But if gold falls below $1,600 an ounce, then this long-term trend will have officially been severed.

Rather than focusing on the technical picture for gold, investors need to stay abreast of the fundamental factors looking at what might push gold higher or instigate an extended period of profit-taking.

The bull case for gold is worth repeating. Central banks in the United States and Europe are inviting trouble by extending their balance sheets to keep economic activity from slumping. As gold bugs aver, the end-result of aggressive monetary and fiscal policies will be sharply higher inflation and depreciation of Western currencies. If this happens, then gold’s “safe-haven” status will surely allow it to attract even more buyers. Of additional concern: inflation has ticked up a bit in Europe and it’s rearing its ugly head in China.

Lastly, gold is a great investment in times of great uncertainty. With the economic mess in Greece yet to be sorted out, gold represents a safe place to be in case of a domino-like collapse across the global financial system.

But how realistic is such a scenario? And how realistic is it to expect inflation to begin soaring at many economies? Let’s take a look…

1. The catastrophe play
Memories of the Lehman Bros.-fueled economic collapse still linger in the minds of many investors. That was a brutal era, highlighted by a brief period when banks couldn’t even access overnight lending windows. The crisis could have been far worse had it not been for some quick and decisive action by central banks to keep the spigots flowing.

Now, we have the Greek crisis to contend with. If a resolution fails to emerge soon, then gold will likely regain its strength. But recent signs in Europe point to a different conclusion. The region’s major players (such as the German government) continue to move cautiously, while seeking a fresh bailout package for Greece that addresses the needs of the wide number of stakeholders, from banks to taxpayers. It’s hard to see at times, but real progress is actually being made. Greeks are belatedly embarking upon an even deeper set of spending cuts, while Germany has tacitly acknowledged a Greek default isn’t acceptable, simply for fear of the unintended consequences it might trigger. Lastly, the International Monetary Fund is finally working with all members of the EU to line up support for an additional lifeline for Greece.

Greece may still well go into default and have to leave the EU, but as long as it takes place in an orderly fashion, the gold “safe haven” play simply won’t be necessary. This is what the recent pullback in gold is telling you, so any further move toward a long-term settlement will pressure gold further.

2. Price action
What about that inflation concern? Are the actions taken by central banks now setting the stage for a return to high inflation in the future? No, this won’t likely happen for one simple reason: the global economy is too weak right now. With so many manufacturers sitting on too much idle capacity, it would take several years of sustained strong global economic growth to create bottlenecks among global supply chains. As a result, manufacturers have almost no pricing power. And although inflation has ticked up a bit in Europe and China, currency issues and the Chinese housing expansion are causing near-term price spikes.

The multi-year gold rally — which is now showing signs of fatigue — has been predicated on concerns that we’re headed for ruinous inflation. But this is an era in which workers and companies have little purchasing and pricing power. In addition, we’re nowhere near global economic capacity. As a result, prices are likely to remain dormant for a long time to come. Many former gold bugs now appear to be reaching this same conclusion.

Risks to consider:  The crisis in Greece is likely to exact painful concessions from all parties when a resolution finally comes. Yet if any key parties balk at necessary concessions, another Lehman-like crisis could still happen, leading to another flight to gold. This is not a high-probability outcome but worth examining.

Action to Take –> Many gold-producing stocks failed to keep up with gold’s heady rally and are still undervalued in relation to the underlying metal. If you still think a gold rebound may come, then gold producers such as GoldCorp (NYSE: GG) look like the best gold stocks to own right now, rather than the exchange-traded funds like SPDR Gold Shares (NYSE: GLD). If you think gold has further to fall, as I do, then you could short the GLD outright, perhaps using Goldcorp as a long hedge.