Small Gold Correction Possible After Run Up

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 near-record net length, analysts said.
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 profit-taking pressure late in the U.S. morning, observers said. After hitting a contract high of $916.60 an ounce, February gold on the Chicago Board of Trade fell as far as $894.70 before stabilizing, at least for now.

The yellow metal has been supported by worries about weakness in the U.S. economy, credit-market problems, expectations for U.S. interest-rate cuts that could lead to further inflation, and global tensions in parts of the world such as the Middle East.

“I think a correction is likely sooner rather than later,” said Jim Steel, precious-metals analyst with HSBC. “Whether it will in fact be the end of the bull-market rally is another issue. But it wouldn’t surprise me that if other commodities continue to weaken, and given the extraordinarily high net speculative open interest, that we see a correction.”

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 profit-taking.”

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.

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.

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