(Kitco News) - Gold and silver continue to see solid selling pressure, but according to one market analyst, this is where investors will see the true grit in the marketplace.
From its lows in mid-February to its recent all-time highs above $2,448 an ounce, the gold market has rallied roughly $450. In a recent comment to Kitco News, Ole Hansen said that gold had been looking heavy, as it could not hold gains above $2,400 an ounce twice in the last two weeks.
“From a trading psychology perspective, it makes sense that some trigger-happy longs would start to take some chips off the table,” he said.
Overnight, gold prices dropped to a low of $2,304.60 an ounce, as low liquidity added to the market’s volatility; prices have recovered during the North American trading session. June gold futures last traded at $2,334.20 an ounce, down 0.52% on the day.
In his latest research note on gold, published Tuesday, Hansen described the latest price action as a healthy and long overdue correction. He added that this selling pressure, “will help determine the real level of underlying demand besides momentum and managed money accounts, who normally trade with a short-term focus and will reduce longs should the technical and/or fundamental picture change.”
Looking at gold’s technical picture, Hansen noted initial resistance at $2,322 an ounce; however, he said he is watching a key Fibonacci retracement level between $2,255 and $2,260 an ounce.
“Holding above this level will send a signal to the market that the retracement is nothing but a weak correction within a strong uptrend,” he said.
One critical factor that continues to support gold is the breath of the rally itself. Hansen pointed out that even within this correction, investors are still holding on to solid gains.
“The depth of the correction now unfolding will depend on whether levels are broken that force hedge funds to reduce parts of the 17.9 million ounce (557 tons) net long position they amassed below USD 2,200 during a four-week period to March 12,” he said. “While the current price is well above those entry levels, it is also safe to assume that these positions will be defended at significantly higher levels, hence the reason why we saw the biggest one-day slump in almost two years.”
Looking beyond the near-term volatility, Hansen said that he remains bullish on gold in the long term. He added that the factors behind its breakout rally remain in place.
While geopolitical tensions have stabilized in recent days, they have far from eased. At the same time, central banks continue to buy gold and diversify away from the U.S. dollar.
The market is also expected to see further demand from Chinese investors as they hedge against equity market weakness and a devaluing currency.
Although market expectations have pushed back expected Federal Reserve rate cuts, which have supported higher bond yields and a stronger U.S. dollar, Hansen notes that this has become a secondary factor in the marketplace.
Hansen pointed out that rising government debt in major economies will support gold even as bond yields rise.
“Treasury yields are not necessarily negative for gold as they raise the focus on overall debt levels and the sustainability of those,” he said.
