Gold prices fall as Cyprus fears ebb

gold prices outlook
Gold prices are down 5% this year. Click chart for more on commodity prices.

Gold prices have dropped to their lowest level in a month, as investors bail out of the precious metal now that Cyprus has managed to avoid a full-blown crisis.

Gold is trading around $1,575 an ounce, down 5% for the year. Adding to the downside, Credit Suisse cut its outlook for gold prices this year and next, saying demand in China won't be enough to offset a slowdown from other countries.

But some experts think the decline may only be temporary.

Just two months ago, the precious metal was closing in on $1,700 an ounce. With the Dow and S&P 500 at new record highs, and CNNMoney's Fear & Greed Index once again nearing extreme greed, it's not unusual to see a pullback in the precious metal. Investors tend to flock to gold as a safe haven when they get rattled.

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"There's always volatility in gold," said Douglas Borthwick, managing director at Chapdelaine Foreign Exchange. He still expects gold to move higher this year, pointing to increasing demand from emerging markets and geopolitical uncertainty. He said more bad news out of Europe or continued fears about North Korea's nuclear saber rattling could cause "agita" and drive prices higher.

Borthwick also noted the underlying concern about the Federal Reserve's bond buying program, or rather the timing of when that ends. His rationale? Investors in stocks have gotten too used to the Fed continuing to ease. So when the Fed finally does signal that its asset purchases are coming to an end, Borthwick said that may create more fear and uncertainty that "could push gold higher rapidly."

Also, there's lately been a shift away from paper money. Just take a look at what's been happening with virtual currency bitcoin. The four-year-old digital currency has been on a tear as speculators have jumped on the bitcoin bandwagon.

"Gold's short-term prospects are uncertain," said Jeffrey Nichols, managing director at American Precious Metals. "We could very easily see a further retreat, possibly as low as $1,520"

Still, gold is also widely used as a hedge against inflation. One reason it has rallied in the past few years is because the Fed and other central banks have devalued their currencies through low interest rates. You could argue that the end of the Fed's quantitative easing could lead to higher bond rates and a stronger dollar. That would be bad for gold.

But any change in monetary policy could be outweighed by fears about fiscal policy in the U.S. The potential kerfuffle over the debt ceiling, which will again need to be raised, should hit the front burner in the next few months.

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It's worth remembering that gold hit at a record high of $1,923 back in September 2011 -- shortly after Standard & Poor's stripped the United States of its AAA rating.

The credit downgrade came after weeks of partisan bickering on the debt ceiling. Any repeat of that type of brinksmanship could be enough of a catalyst to push gold prices higher again.

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