Gold price may experience further short-term weakness due to excessively bullish sentiment

The gold price slid $2.15 to $1,598.55 per ounce Thursday morning, following yesterday’s 1% decline. The price of gold hovered near unchanged on thin volume this morning after tumbling $16.36 to $1,588.49 per ounce on Tuesday – ending its eleven session winning streak. Gold prices surged to new all-time highs of $1,610.70, but turned sharply lower following reports that President Obama and congressional Republicans were close to a resolution that would allow the U.S. to meet its August 2 debt ceiling deadline. The gold price later reached an intra-day low of $1,582.70, but modestly pared its losses into the close.

However, despite yesterday’s gold price decline, the yellow metal remains higher by 5.6% in July and 11.8% year-to-date. Although the gold price may experience further short-term weakness due to excessively bullish sentiment, the longer-term outlook appears bright. Governments and central banks around the world – particularly in the U.S., Europe, and Japan – have done little to address the structural problems of surging debts and deficits. Instead, policymakers have chosen to move further into debt to stimulate their sluggish economies.

Ray Dalio, head of the world’s largest hedge fund, Bridgewater Associates, discussed this trend in a recent interview with The New Yorker. Dalio, whose firm oversees close to $100 billion, contended that many of the world’s developed nations, including the United States, will eventually choose to print more money as a way to inflate away their debts.

Such actions will eventually “lead to a collapse in their currency and in their bond markets,” Dalio continued. “There hasn’t been a case in history where they (governments) haven’t eventually printed money and devalued their currency.” As for the timing of such events, Dalio forecast that they will begin in late 2012 or early 2013.

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