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Gold isn't looking so good these days, but gold stocks are looking downright ugly.

In midday activity on Thursday, gold fell to a two-month low of $1,640 (U.S.) an ounce, down $10. That puts the price back to where it was in August 2011, and nearly 14 per cent below its peak in September, when gold broke the $1,900 barrier.

But that setback is nothing compared with gold stocks. The NYSE Arca Gold Bugs index, which tracks the world's biggest gold producers, has slumped to its lowest level since August 2010 – when gold traded about $400 an ounce below its current level – and the index has fallen nearly 27 per cent from its high in September. In other words, gold stocks are mired in a deep bear market.

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There are a lot of moving parts at work here. For sure, gold is being held back by a surprisingly robust U.S. dollar. The greenback has seen some life with the improving U.S. economy and diminishing expectations that the Federal Reserve will have to resort to more experimental monetary policy – the kind where the Fed buys bonds using printed money.

Some observers are even looking at their calendars for when the Fed is likely to raise interest rates, which is something it hasn't done since way back in June 2006.

But there are consumption issues weighing on gold, as well, with concerns about China's economy translating into fears that people will buy less jewellery.

Dennis Mark, a technical analyst at National Bank Financial, pointed out on Wednesday that there have been a number of technical cracks in the chart for the Gold Bugs index, with the index failing to hold above 490; it's now below 467. He sees the downside risk is for the index to fall to 430. However, after such a brutal period, he thinks the index could be due for a rebound – and that could take it to its 50-day moving average of 520.



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