Are things getting uglier for gold?

It's a tough time for gold prices at the moment. The $15 per ounce rise seen yesterday has been wiped out UK and Asian trading today, as the US dollar climbed and stock markets stayed cautious, in anticipation of tapering action from the Fed tomorrow.

HSBC have said in a note: "The bullion market is likely to continue to mark time ahead of the FOMC statement".

A few analysts have hailed a change for gold prices. Last week, the chief executive of Compass Global Markets, Andrew Su, said gold prices could see a rally of around five per cent before the end of the year, and that gold has found a floor at $1,200, which he doesn't think will break.

And HSBC says that, post the Fed's meeting, its outlook is more favourable: "Speculators still hold significant short positions. The approaching year end may lead to a covering of spec shorts, which is price supportive in our view."

But according to Peter Garnry, head of equity strategy at Saxo Bank, in order to get closer to long-term fair value, gold could go below $1,000.

Overall trust in the financial system is growing, as several indicators on the interbank and lending markets show, and the gold bubble is being slowly deflated, says the investment bank.

It pointed out two weeks ago that rising stocks and real rates are prompting a slow-burn burst, as the precious metal remains in a critical position, struggling around key technical levels. Since its peak in August 2011, the price of gold is down 35 per cent.

Garnry says:

The downside risk is significant in 2014 if the global economy continues to expand.

Rather than the $5,000 price levels gold bugs were foretelling not so long ago, Garnry wonders whether gold's protracted underperformance means "it is all ending in tears".