Gold is in its worst slump since 1996

3 reasons gold prices are falling
3 reasons gold prices are falling

So much for predictions that gold would spike to $2,000 an ounce.

The yellow metal is in a deep slump. It's down more than 40% from its 2011 peak and crashing back toward $1,000.

The slide just keeps getting worse. Gold has declined for 10 straight days. That's the longest losing streak for gold since September 1996.

To put that into perspective, back then oil prices were fetching just $19 a barrel, New York Yankees rookie shortstop Derek Jeter was nearing his first World Series title and rap fans were mourning the death of Tupac Shakur.

Related: Gold plunges to 5-year low

So why is gold getting creamed? It comes down to three key factors: a strong U.S. dollar, China slowing down its gold purchases and little worry about inflation anymore.

1. Strong dollar: A strong greenback hurts commodities that are measured in dollars because it makes them more expensive for overseas buyers. It's a double negative for gold because the precious metal is supposed to be a hedge against inflation and the devaluing of currency.

"Gold has taken it on the chin with the strength in the dollar. Over the past week or so, it was almost like a perfect storm," said Bob Alderman, head of wealth management at Gold Bullion International, a provider of precious metals.

The U.S. dollar lost ground against most currencies on Thursday, giving gold a short reprieve. Gold prices ticked up 0.2% to $1,093 an ounce. But over the coming months, the dollar is expected to keep climbing.

gold prices slump

Related: What's behind the falling price of oil, gold and copper?

2. China, Iran & Greece: Gold plummeted by as much as $40 an ounce in mere minutes after China's central bank gave a rare update on how much gold it's hoarding. The numbers showed the world's largest gold producer has been stockpiling gold reserves at a slower pace than previously thought, spooking gold investors.

Gold has also been hurt by easing tensions in Europe and the Middle East. Iran's landmark nuclear agreement with the West has lessened some fears about a conflict in that volatile region. Those fears had allowed gold, and more so oil, to trade at a premium.

Likewise, Greece landed a last-minute deal with its creditors that allows the crisis-ravaged country to stay in the euro. Investors are no longer speculating about a Greek exit or the long-term implications for the currency union.

"The new bailout softened the fear of contagion. That was not a good thing for gold," said Alderman.

Related: 3 reasons gold prices are falling

3. What inflation? Inflation worries also remain muted. When gold topped $1,900 in September 2011, some investors bought gold because they feared the Federal Reserve's money printing would cause runaway inflation. But inflation continues to undershoot the Fed's goals despite extremely low interest rates and years of massive bond purchases.

"Over the last 5,000 years gold has been a store of value that will be there for a time when there is inflation. There is no inflation now," said George Gero, vice president of global futures at RBC Capital Markets.

In fact, the recent collapse in the commodities complex is only lowering inflation and inflation expectations. Everything from coffee, sugar, beans to crude oil is heading south. Industrial metals like copper and aluminum have renewed their tumble in recent days as soft global economic growth hurts demand and supply gluts deepen. All of that is creating an anti-inflationary environment that sucks the air out of the gold market.

Related: Are 25% of physical gold buyers crazy?

Could gold fall below $1,000? The big question is what will happen when the Federal Reserve finally starts raising interest rates, as it signaled it will do later this year. A rate hike will only strengthen the dollar, putting more pressure on gold.

That's a major reason why Goldman Sachs commodities chief Jeffrey Currie warned this week that gold could dip below $1,000 an ounce for the first time since 2009.

Others believe gold will bounce back. Gero said it's due for at least a short-term bounce next week. Alderman thinks it could withstand a stronger dollar, as it has done for stretches in the past.

"We firmly believe that over time there will be a reversal. Gold remains the ultimate store of value during the worst of times and a great diversifier in the best of times," said Alderman.

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