(Kitco News) - Commodity analysts have been warning that gold’s rally to record highs above $2,400 created dangerously overbought market conditions; however, with solid fundamentals, analysts have also said that any market correction should be seen as a buying opportunity.
Although gold is seeing a sharp selloff to start the week, some analysts believe that investors need to put the price action into perspective. Although gold prices are down more than 2% early in the North American session, they appear to be holding initial support at around $2,350 an ounce.
June gold futures last traded at $2,348.60 an ounce, down 2.7%% on the day. Along with holding a critical support level, gold’s 2% drop is still minor compared to its broader rally. Since holding support at $2,000 in February, gold prices are still up nearly 17.5%.
Silver is seeing an even sharper correction as it has fallen below $28 an ounce. May silver futures last traded at $27.525 an ounce, down 4.6% on the day.
Some analysts warn that gold prices still have further to fall as focus returns to U.S. monetary policy and shifting expectations that the Federal Reserve will maintain its aggressive monetary policy longer than expected.
According to the CME FedWatch Tool, markets see a 16% chance of a cut in June and a less than 50% chance in July.
“The precious metal finds itself ensnared in a balancing act between the flight to safety on the one hand and the rise in treasury yields and a strengthening dollar on the other,” said Ricardo Evangelista, Senior Analyst at ActivTrades, in a note Monday. “With tensions in the Middle East showing signs of easing, the market's attention shifted towards assessing the resilience of the US economy and the persistent grip of inflation. As prospects for a near-term rate cut by the Federal Reserve diminish and optimism grows regarding the avoidance of an overt conflict between Israel and Iran, gold prices could be poised for a correction, as traders may start
closing long positions and capitalizing on the profits accrued over the past month.”
Although gold has room to fall further, analysts have said that the factors that drove its March breakout rally remain in place. Central banks continue to buy gold as a safe-haven asset to hedge against rising debt levels and as a hedge against the U.S. dollar. At the same time, Asian investors still dominate the marketplace as they continue to diversify their portfolios.
Nicky Shiels, Head of Metals Strategy at MKS PAMP, said in a social media post that although gold has room to move lower in the near term, she still maintains her $2,500 an ounce price target.
No new bad news is bad news for Gold (& Silver) bulls
War premiums unwound even though Geopolitics (or the US$ or rates) isn't what got Gold up here in the first place.
The pace/trajectory higher will slow in Gold and while $2500 is the next target, I expect it wont be a…— Nicky Shiels (@nixsa84) April 22, 2024
David Morrison, Senior Market Analyst at Trade Nation, said that he also sees potential for gold prices to move lower, but pointed out that previous corrections have proven to be good buying opportunities.
“When precious metals experience the type of gains they’ve seen over the last ten weeks, sell-offs can be deep but also quite short-lived. Despite this, both metals are still a long way above any significant levels of support. Will they back-fill and retest, or just power on regardless?” he said.
In a recent interview with Kitco News, Carley Garner, Co-Founder of the brokerage firm DeCarley Trading, said that she sees a pullback to $2,330 or $2,300 as a solid entry point for investors who missed the initial rally. Her current upside target for gold is at $2,650 an ounce.
Chantelle Schieven, Head Researcher at Capitalight Research, had the most bullish gold prediction in this year’s London Bullion Market Association’s price forecast. She said that gold prices could drop back to $2,150 an ounce this summer; however, she added that she sees gold prices above $2,500 an ounce by year-end, up from her previous target of $2,400, which has already been reached.
As to what levels will be important to watch, with gold’s breakout rally, there are few technical indicators on which to rely. Ole Hansen, Head of Commodity Strategy at Saxo Bank said in a social media post that he is watching Fibonacci retracement levels at $2,322, $2,288 & $2,255.
Although gold is down significantly, some analysts note that investors are still holding on to significant gains, which means there is no urgency to sell.
“Gold prices are overbought, but our advanced positioning analytics suggest that dry-powder on the offer may be surprisingly limited,” said commodity analyst at TD Securities in a note Monday. “Money manager participation in the recent rally has been limited, with the dramatic under-positioning relative to rates market expectations largely resolving by the time gold prices reached $2200/oz, and we see little evidence that macro funds have acquired a substantial long position that would be vulnerable to downside. CTAs have a large margin of safety against the first selling program.”
