In our weekly recap we have been fairly consistent that gold has been in a downtrend but does that mean that the bubble has burst?

In September prices rallied to a high of $1,923.70 and it is now closing the year at its lowest point since mid-July at $1,564.80. That is a drop of more 18% in just under four months.

The reason we have been bearish on gold is because it has broken its long-term uptrend. Looking at a long-term chart we can see that the 200-day moving average as created a fairly strong uptrend. On Dec. 14 that trend was broken when the price closed below $1,600. On Dec. 30 the price managed to hold support at $1,550 but because of the holiday trading season, we can’t take this movement too literally, however we don’t want to rule out another drop.

One of the reasons why gold prices have been dropping is because long-term investors are starting to take their profits. There are probably a lot of investors who are kicking themselves for not getting out at $1,900 and are now not taking any risks as the trend loses momentum. Although we are expecting more declines in the precious metal, we can’t rule a sudden reversal, especially if the support holds around $1,500. According to a recent Bloomberg article, despite the massive selloff gold is ending its 11 year of positives gains and is showing year over year gains of slightly more than 8%; the yellow metal has out-performed equity markets and other commodities.

A break below $1,500 would be a strong bearish move. I recently read one quote that does a good job summing up the sentiment in the marketplace. “Just weeks ago, some were willing to bet their life’s savings on the belief that gold would not reach such a number-certainly not before printing a $2K record into the logbooks. Today the precious metal came to within $22 of touching that “Unholy Grail.” Oops. If and when $1,500 happens, we might suggest making a donation to charity, as a nice gesture of contrition,” wrote Jon Nadler, senior metals analyst at Kitco Metals.

One of the reasons why gold has managed to do so well in 2011 is because it was considered a safe-haven bid. The inverse correlation between gold and equities has weakened in the last few months but some analysts are expecting it to strengthen once again. There is still a lot of market turmoil and if inflation heats up, investors will once again jump back into precious metals to protect their capital.

“Gold, which is a traditional safe-haven asset, is also very likely to get tangled in a broad commodity market correction, as investors build liquidity buffers against tail risk,” wrote analysts from TD Securities. “In sharp contrast, the latter part of 2012 looks much more robust for commodities and gold than the early part of the year, with prices moving sharply higher into Q3-

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For now we will continue to watch the marketplace and watch; however, if prices do start to move up, they will move up quickly. As much as investors are kicking themselves for not selling at $1,900 more are even kicking themselves for not buying at $1,400 before the uptrend.

For more updates from Greg, be sure to visit his blog at TheTradingZone.com