Spot gold and the futures market could be due for a correction after prices ran up to record highs lately, especially with large speculators accumulating
Nevertheless, some suggest any pullbacks could be modest and temporary in a market where so many factors are propelling the buying.
Gold in fact did run into some
The yellow metal has been supported by worries about weakness in the U.S. economy,
“I think a correction is likely sooner rather than later,” said Jim Steel,
Gold’s bullish performance lately is outpacing the weakness in the U.S. dollar, signaling an increase in gold’s intrinsic value, perhaps reflecting the risk from inflation over the medium term or as a hedge on other asset values, said Michael Jansen, strategist with J.P. Morgan.
“However, positioning to the long side has now become acute and suggests that a consolidation is due,” he said in a research note. “The physical market has ground to a halt and scrap volumes have increased, which historically has signaled that the rally should lose momentum and in turn encourage
Nevertheless, he still sees gold climbing toward $950 to $975 an ounce this year with more downside potential in the dollar. This, he said, could mean that any pullbacks in spot gold below $850 would be buying opportunities.
A research report from Barclays Capital points out that speculative net length in Comex gold is approaching record highs — the net long of the large
“Given the speculative length in gold, there is the potential for
Steel said “it’s hard to say” how large of a correction could occur. Nevertheless, he commented that given the extent of the market’s rally, gold could have a “big correction and that wouldn’t phase the overall trend in the market at all.”
Some analysts look for any corrections to be modest.
“I’m not looking for any $75 to $80 drops,” said Ira Epstein, CEO with Ira Epstein & Co. Futures. He suggested gold will move up in $25 increments, set back, then move on to new highs.
“I’ve been saying that since last June, and it’s pretty much done it, if you look at the charts,” Epstein said. “I look for corrections anywhere between $25 to $40, then for the market to regroup and go through the old high by another $25.”
He looks for gold futures to hit $950 by June.
The $900 area gold recently surpassed is not a major benchmark for the market, as crude oil was at $100 a barrel and gold will be if it reaches $1,000, Epstein said.
Some of the past gold corrections were more than $25 to $40. But now the news flow is especially supportive, such as the large quarterly loss reported by Citigroup, concerns about more such developments in the financial sector, and expectations for more Fed rate cuts that will further undermine the dollar, Epstein said.
And even if the dollar stops falling, inflation may continue underpinning gold, he added.
“The market already recognizes the more money thrown into an economy, the more money chasing the same finite goods, which is inflationary,” Epstein said. “You can’t lower interest rates and fight inflation at the same time.”
Zachary Oxman, senior trader with Wisdom Financial, likewise looks for any correction to be small and ending up as a buying opportunity. He looks for consolidation only to $890 or so, although he said if the market closes below $900, it could mean consolidation back to $880.
“I don’t see it dropping back down into the $870s or $860s,” he said. “There’s just too much negative news on the economy and too many people worried about a recession and inflation. That is really going to keep the market trading these levels, if not higher, through the remainder of the year.”
Technical analyst Clive Maund, who has a Web site for gold, silver and oil shares at clivemaund.com, issued a report Tuesday saying “gold is now in a powerful uptrend that has a lot further to run” if the Federal Reserve continues to lower interest rates, thereby hurting the dollar, and money supply continues to balloon not just in the U.S. but worldwide.
With many gold stocks hitting overbought extremes based on
“The view here is that although this would normally be the case, the current uptrend is destined to be a long and powerful upleg, and corrective action is therefore likely to be modest and probably only involve periods of consolidation,” Maund said. And, he continued, “that may even be upwardly skewed, and thus leave behind premature
As an example, he cited the streetTRACKS ETF, which appeared overbought based back in September but continued substantially higher since after just two or three weeks of sideways consolidation.