When all was said and done, Q1 wasn’t good for gold.

The precious metal lost 4.8% of its value between the end of 2012 and the end of March — the second consecutive losing quarter. Indeed, between Q4’s loss and Q1’s loss, gold has fallen more than 10% over the past six months, which is the worst half-year stretch gold has seen since 1999.

Yet, even with the strong selling, gold has yet to move under the key figure of $1,540 (per ounce). Until that happens, gold still has a decent chance at recovering and resuming its long-term rally.

So what’s next for gold? To understand where a commodity is going, we have to get a grip on why it has been where it has been.

What’s Working for Gold?

The number of forces working in gold’s favor is shrinking, although the two key items left on this list are biggies.

• Europe: While fears of a eurozone economic implosion are muted compared to 2009’s worries, this nagging fear has never really gone away. And it has lingered for good reason — the EU is technically in a recession, and its GDP is expected to have shrunk by 0.5% for the first quarter of this year. Worse, just when the eurozone’s debt woes look like they’re being contained, Cyprus reignites those problems by announcing it needs a bailout. Who’s next? As long as so many countries continue to struggle, traders will look for safe-haven trades (probably).
• Mania: It’s a bit low-brow to suggest gold’s post-2007 climb is largely because of an “economic Armageddon” herd mentality. However, that mentality has persisted for years; survivalists are still hoarding gold in their bunkers, and some central banks continue to buy at near-record levels. Though Q1’s numbers aren’t in yet, central banks bought 145 tons of gold in Q4 of 2012, which is the second-biggest buy ever. The biggest is the 161 tons bought by government banks on Q2 of 2012.

What’s Working Against Gold?

While trouble in Europe and gold-fever are working hard to prop gold up, they’re losing that battle to more (and more meaningful) factors undermining strong gold prices.

• Decent economy: Although it wouldn’t be accurate to say any economy is roaring, expectations of a U.S. economic contraction have yet to be realized. Q4’s U.S. GDP grew at an annualized rate of 0.4%, much better than initial expectations of a 0.1% contraction. This persistent, if modest, economic progress has slowly been chipping away at gold mania.
• Rising U.S. dollar: Since the end of last year, the U.S. dollar has increased in value by 4%. That’s might not be much for a stock, but for a currency, that’s huge. And because gold is priced in dollars, the more valuable the sawbuck gets, the more value gold should lose. With a currency war quietly being waged (despite the insistence from most nations that there is no war), the dollar is poised to keep rising. As such, gold prices should continue to see pressure.

• Lack of inflation: If you think back to 2008, fears of stimulus-driven inflation kicked off gold-mania; traders were convinced a flood of cheap dollars would drive inflation through the roof. But it never happened. The current inflation rate is only 1.98%, and the highest inflation rate we’ve seen since 2008 was the 3.87% figure from September of 2011. With help from a decent economy, weak inflation reduces need for a safe-haven trade.
• Huge fund outflows: Barring any miraculous reversals of fortune in the latter part of the last week of March, the SPDR Gold Shares (NYSE:GLD) — the world’s biggest physical-gold ETF — was expected to see its biggest-ever outflow in the first quarter of this year. If nothing else, this suggests the previous gold bulls have quietly changed their mind. There has to be a reason for the 180-degree turnaround from at least some traders.

What’s Next for Gold?

Weighing the bullish and bearish pressures, there’s only one reasonable conclusion here: Gold still is under attack, and due for more downside.

That’s not to say we won’t see short-term bullish swings for gold. We will — knee-jerk emotional reactions can temporarily hijack any chart. And, until the support at $1,540 is broken, any bearish forecast for gold is moot.

The bigger-picture undertow, however, is working against the precious metal, and it’s only a matter of time before those pressures take a measurable toll.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities, nor any gold-related instrument.