By Melissa Pistilli—Exclusive to Gold Investing News
After hitting record highs of $1249 an ounce last week, gold has lost much of its May luster the past few days, dropping as low as $1174 an ounce in New York Thursday morning.
There are number of factors at play here, including Germany’s move to ban naked short selling, which triggered a return to heightened risk-aversion and frenzy of selling across the markets. Even gold is not immune to the spreading fear over the impact of debt problems in the euro zone.
While traditionally one would expect the precious metal to be trading up in such an environment, uncertainty across all markets remains high. The dollar seems to be the go-to safe haven rather than gold at the present moment, but even the greenback took a hit later in the trading day Thursday.
Some analysts are not surprised by gold’s nearly $70 slide off its Friday high, claiming a majority of the loss is justified after an overdone rally. “When gold hit highs last week we were looking for some correction,” said Standard Bank analyst, Walter de Wet. “I wouldn’t be surprised if it tested $1,170.”
Most of gold’s losses Wednesday and Thursday can be attributed to profit-taking and margin-covering. As stocks and commodities tumbled, many investors turned to their gold holdings to cover their trading losses and market margins calls.
“When we hit all-time highs, everybody thought gold was going to shoot straight up to the moon. Now, a lot of people have decided to take their profits, and the big banks just put in sell orders that hit the market,” said Dominick Cognata, COMEX gold floor trader.
Daniel Major, an analyst at RBS Global Banking & Markets, said it best: “What is the use of an insurance policy if you can’t cash it in at some point? The reason why people might hold a percentage of their portfolio in gold is because it is generally uncorrelated to other assets, and people could easily be selling it down to cover margin calls in many other asset classes.”
While in the short-term many see gold prices moving further to the downside, bullish sentiment over the medium- to long-term remains.
“The path of least resistance is expected to remain down, with the next downside target on the charts seen at $1,175 and perhaps even as low as $1,166.90. Until the trade becomes confident that the global economy will avoid a double dip recession off the Euro zone crisis, we suspect that the bias in the gold market will remain down,” said Global Securities futures analyst Jamie Greenough in a note to clients.
Looking forward, “problems in the euro area should continue to provide some support. These debt problems are not going to go away overnight,” said Standard Bank’s de Wet. “Gold will continue to have this increased safe haven status.”
Ongoing financial problems out of the euro zone are seen as price supportive over the longer term. “I still think gold has support from this sovereign-risk element,” said Bart Melek, senior economist at BMO Capital Markets. “That is something that will be with us for some time.”
Gold closed Thursday at $1184 an ounce on the COMEX.
