Gold falls as analysts warn of correction
By Simon Lambert, October 27, 2009
Gold has taken its biggest tumble since hitting a record high in the middle of October, as analysts warn of a potential pullback.
A stronger dollar left gold nursing its biggest drop in almost three months yesterday, unsettling jittery investors who fear a correction for bullion.
Gold lost around 1.6% on Monday, with the spot price falling to $1,038 from $1,055, its biggest fall since 28 July.
It has remained in the doldrums today, trading between $1,032 and $1,044, with the spot price at $1,037 at 6pm.
In an investment note, Commerzbank analyst Eugen Weinberg said inflows into exchange traded funds had slowed dramatically.
He said: “We continue to see the downside risk of a price correction in gold.”
Gold has roared ahead over the past month, with the closing spot price rising from $999 on 1 October to hit a high of $1064.3 on 13 October, before slipping back to mainly trade between $1,055 and $1,060.
This has come as the dollar has weakened, with investors looking to the perceived safe
haven of gold over the US currency. On 14 October gold breached $1,070 before slipping back.
Investors will be closely watching the next move for the precious metal and the dollar, as while most analysts predict gold will rise substantially higher over the longer-term, many suggest a correction will arrive before this.
This has transferred through to a lack of meaningful investment in gold ETFs recently, observed Commerzbank’s Weinberg.
He said: ‘We have been observing that the number of short positions rose for the third week in a row, signaling that an increasing proportion of market players view the current gold price level as unsustainable.
‘Should this sentiment spread further among market participants, the gold price could come under considerable pressure. Bear also in mind that the gold price rally of the past weeks was largely the result of a softer US dollar.
‘Without further US dollar weakening, gold would lose one major price supporting factor, especially as – on the back of the high price level – the physical demand in India has already weakened significantly after the conclusion of the festive season.
The outlook for gold
While many predict an imminent pullback for gold, analysts suggest over the longer term bullion could stage a strong run into the New Year and beyond.
The major factors gold fans point to are inflationary pressure from low interest rates and quantitative easing, the dollar’s weakening position as a global reserve currency and an increase in demand from private, institutional and national investors.
Charles Gibson, head of mining research at Edison Investment Research, says gold could fall back to $1,015 before embarking on the second phase of its bull run. Meanwhile, gold dealer PhysicalGold has a target price of $1,200 for gold over the next six months and says that while supply remains limited, demand is increasing rapidly.
Daniel Fisher, of PhysicalGold, says: ‘Even more poignant for a sustained gold run is the expectation of what will happen once economies pull out of recession and into growth.
‘Most literally, there will likely be an increase in industrial demand for gold, with its use in the electronics world. But it is the threat of inflation which will provide the most significant support for the gold price.
‘With such a deep trough, and the associated size of the stimulus packages used to emerge from these, the ensuing growth may succumb to inflationary pressures. While this would erode the value of paper currencies, gold provides a protection against inflation.’
Not all investors are so certain, however. Gold’s October rise has come as the dollar has been battered and the stockmarket has soared. If the dollar has been oversold, markets correct and fears of inflation subside, bullion could fail to achieve the predicted next phase of the bull run.
Justin Urquhart Stewart, of Seven Asset Management believes if the dollar recovers gold my fall back. ‘It is gaining as a result of hype and speculation, remember you can’t do anything with gold and it yield’s zero,’ he says.