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Strategists look for renewed gold buying after correction

Kitco News

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(Kitco News) - Gold futures could slide some more as traders continue to liquidate bullish positions taken out during recent U.S.-Iran tensions, but once this ends, look for buyers to step back into the market as the focus returns to macroeconomic issues, traders and analysts say.

“Longer term, dips in gold and silver will be bought,” said Sean Lusk, co-director of commercial hedging with Walsh Trading. “But for right now, the longs [bullish traders] are under duress a little bit.”

Gold raced to roughly seven-year highs last week when Iran launched missiles at a U.S. base in Iraq in retaliation for a U.S. air strike that killed an Iranian general. Comex February gold peaked at $1,613.30 an ounce on Jan. 8, which at the time was a gain for the new year of 5.9%.

Since then, however, the contact has fallen back as far as $1,536.40. At that price, the year-to-date percentage gain was trimmed to 0.9%.

“It got to be a pretty crowded trade at those higher levels,” said Phillip Streible, chief market strategist with Blue Line Futures. “Up over $1,600, it seemed like everyone was jumping into the market. Now the market is starting to liquidate. All of those guys who jumped in on those Middle East tensions are going to continue to liquidate.”

A break below $1,540 could portend a slide down to longer-term support around $1,504, Streible said. The market is putting in a “head-and-shoulders” pattern that could signal more weakness for a while yet, he explained.

Lusk, commenting that there may have been an “overreaction” in the market to the U.S.-Iran situation, also described the bulk of the selling as long liquidation, in which traders are exiting bullish positions to either capture a profit or limit a loss.

“I don’t think there are new shorts [fresh short selling] coming into the market,” he said.

Further, Lusk added, the slide in oil prices during the U.S.-Iran de-escalation, coupled with stronger equities, added to the pressure on gold. And, he continued, fund managers were net bullish by a hefty 229,757 futures contracts in the last positioning report from the Commodity Futures Trading Commission.

“The last time we saw that type of long was late August and early September, when prices surged to a late-summer seasonal high, then backed off $100,” he said. “I think longs in the market got way extended….A lot of those late longs are the first ones out. The market is still correcting itself here.”

But that doesn’t mean investors are likely to give up on gold for the longer term, Streible and Lust related.

“Once they’re done [unwinding recent long positions] and the chart pattern completes itself down at $1,504, people will reassess,” Streible said. “Is the Fed going to do anything? It doesn’t look like they’re doing anything for quite a long time.”

For one thing, Streible said, the December consumer price index report released early Tuesday was “quite muted.” Consumer inflation rose 0.2% last month, down from 0.3% in November. Excluding the volatile food and energy components, prices were up just 0.1%. Tame inflation means less odds of any Fed rate hikes.

“That’s why I think people are going to start coming back in the market,” Streible said. “They’ll see value in gold back at $1,500.”

Lusk put the nearby support for February gold around $1,530 an ounce, which is not far from the 50% Fibonacci retracement of the rally from the November low to the high last week. Below this, he put support at the end-of-2019 price of $1,523.10, then the 100-day moving average around $1,506 and the 50-day around $1,495.

“We might have a little more to go,” he said of the downside move.

But he also looks for buyers to eventually step back in, citing uncertainty due to the U.S. presidential election in 2020 and the desire for diversification that brought investors into gold in 2019.

“Longer term, the bigger money is going to wait for that correction [to run its course] and then buy it,” Lusk said.

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