As gold prices near $2,000 an ounce, some bulls say it’ time to take money off the table after the safe-haven rally extended too far too fast in recent weeks.
Gold investors at several firms said gold prices could correct sharply, citing overvaluation. While that does not mean prominent bulls are now bears, they recommended investors take profit on gold holdings, after the precious metal traded briefly above $1,900 on Tuesday for the first time.
Spot gold rebounded more than 1 percent to above $1,853 an ounce on Wednesday after sliding more than 3 percent in the previous session in its biggest daily fall in a year and a half. Investors in droves have sought a refuge in bullion from a stock market meltdown, fears about sovereign debts in Europe and the United States and worries about a recession.
Gold has gained nearly 9 percent in just the last six sessions before Tuesday’ fall and by more than $400 since July.
Independent investor Dennis Gartman, who has long been bullish on gold priced in non-U.S. currencies, said he was reducing his long positions on gold priced in euro and sterling terms.
“Perhaps things have become a bit too frothy and reduced rather than increased exposure seems reasonable and wise,” Gartman said.
Gartman said gold’ rally was not sustainable after SPDR Gold Trust (GLD.P)’ total assets surpassed that of the SPDR S&P 500 ETF, making GLD the largest exchange-traded fund in the world for the first time. “Such things senseless happen after periods of euphoric rises in prices of some markets,” Gartman said.
A resurgence in investment demand has fueled gold’ rally in the past decade, particularly during periods of global economic slowdown, growing from 4 percent of total demand in 2000 to over 39 percent in 2010, according to estimates from Citigroup. “However, we caution that this very aspect that provided support for gold over this time may result in its downfall going forward,” the bank said in a note. “Even a slowdown, let alone a decline, in net investment flows can have a materially negative impact on the gold price from current levels.”
Still, Wednesday’ bounce showed gold’ appeal is far from fading as buyers picked up the precious metal after its sharp decline on Tuesday.
“It’ premature to call it a correction. But there is quite a bit of downside risk if gold breaks below $1,800 on a sustained basis. It may go lower to $1,700 or so,” said Ong Yi Ling, an analyst at Phillip Futures. Ong said the current environment of low interest rates and a weak dollar remain supportive of gold prices, adding that the potential of further quantitative easing by the Federal Reserve to boost an ailing U.S. economy also increases gold’ appeal in the longer term.
BUY THE RUMOR, SELL THE NEWS?
But UBS metals strategist Edel Tully said the Swiss bank “has certainly noticed an increase in clients looking to book profits.” In a note on Tuesday, Tully also cautioned that the risk of more margin hikes from CME Group was rising, after the U.S. commodity exchange raised margins by 22 percent earlier in August.
Fund managers said the metal was bid up as an inflation hedge on expectations of further U.S. monetary easing, and bullion could sell off if Federal Reserve Chairman Ben Bernanke does not announce a new bond-buying stimulus program at an annual Fed conference in Jackson Hole, Wyoming on Friday.
“There is some potential degree of ‘buy the rumor, sell the news’ on any future Fed policy that may come out at Jackson Hole. Investors might want to have that on the back of their minds as well,” said Michael Cuggino, portfolio manager of the $15 billion Permanent Portfolio Funds.
“Gold being as volatile as it is, it can go down in $100 to $200 and not really blink an eye,” Cuggino said. Analysts said anything short of a third round of quantitative easing would likely provide limited support for gold as the Fed had already vowed to keep interest rates low into 2013.
Cuggino said that investors should stay put and not add new gold positions at current prices, even though the metal is still a safe haven and an integral part of an investment portfolio in longer term.
Mark Luschini, chief investment strategist at Janney Montgomery Scott, a broker-dealer with $54 billion in assets, said that on charts, gold is vulnerable for a sharp pullback as it is trading at $400 above its 200-day moving average, a sign of overbuying.
“From a purely technical standpoint, I think it’d be wise to take some chips off the table,” Luschini said.
SLOW SEASONAL DEMAND
“Given that we are in the seasonally slow period for physical demand, we believe prices could be subject to temporary corrections as profit-taking emerges,” Barclays Capital said in a research note. Scrap supply teased out by lofty prices and potential margin requirement hikes could act as temporary barrier to gold’ ascent, it added. But Barclays said those factors are only likely to temper the rally intermittently.
“Beyond this, we believe the macro environment is evolving increasingly favorably for gold, and a return of market confidence in the state of the global economy, coupled with high and rising real interest rates and controlled inflation, will be required to quell its gains,” said Barclays.