(Kitco News) - Gold’s eight-week winning streak has come to a grinding halt as the precious metal is looking at its largest loss since the week of the November election.
After hitting a fresh record high above $2,970 an ounce, gold has been on a one-way decline, with prices falling to a three-week low. April gold futures last traded at $2,850 an ounce, down more than 1.5% on the day and down more than 3% from last Friday.
While gold’s drop has been dramatic, many analysts have said that the volatility is not surprising; the precious metal has been technically overbought as investors have tried to push it to $3,000 an ounce.
Ole Hansen, head of Commodity Strategy at Saxo Bank, described this week’s price action as an overdue correction. He added that he could see gold testing support at about $2,800 an ounce. At the same time, he expects silver prices to fall below $31 an ounce.
“Where gold goes, silver follows, but often at a faster pace,” he said. “Some attention should be given to the 0.5 and 0.618 Fibonacci retracement levels at $31.08 and $30.54, with the latter also being the 200-day moving average. Overall, we see this as a healthy correction before a fresh push towards $3,000 and beyond for gold and silver moving towards the high $30s.”
Despite the drop, many analysts have said that the selloff has done only limited technical damage to gold.
“As of now, it's a routine pullback, and I'm not worried. It could pull back and retest the $2,800 support, which was the late-October high,” said Jess Colombo, an independent precious metals analyst and founder of the BubbleBubble Report. “If, for whatever reason, it closes below that $2,800 level, I would take a more defensive outlook that would apply to mining stocks and short-term trading positions, but not my physical bullion holdings.”
Colombo noted that it is difficult to be outright bearish on gold as inflation pressures continue to rise and the U.S. economy continues to weaken.
In the latest example of growing economic risks, the Atlanta Federal Reserve released its latest Gross Domestic Product forecasts. The regional central bank sees the U.S. economy contracting by 1.5% in the first quarter of this year. This is a sharp deterioration in economic conditions compared to last week when the Atlanta Fed was forecasting 2.3% growth in Q1.
Analysts also noted that gold should remain well supported as a safe-haven asset as the U.S. government under President Donald Trump announced it will place 25% tariffs on imports from Canada and Mexico and 10% tariffs on China starting March 4. The move is expected to ignite a trade war as Canada and Mexico prepare to retaliate against the U.S. with targeted tariffs of their own.
Kelvin Wong, Senior Market Analyst at OANDA, expects gold prices to remain in a solid long-term uptrend even as prices correct in the short term. He added that the key support level he is watching is $2,716 an ounce.
“A daily close below this level is likely to trigger a deeper multi-month corrective decline phase,” he said. “The current weakness from Monday’s fresh all-time high is likely a corrective decline with a multi-week time frame due to potential net long speculative position unwinding in the futures market.”
Wong added that any further deterioration in economic data will provide safe-haven support for gold.
The release of February’s nonfarm payroll numbers next week will renew the focus on the U.S. labor market. At the same time, traders and investors will pay attention to service sector and manufacturing sector PMI data.
Investors will also eagerly await the European Central Bank’s monetary policy decision, which could have broader implications for gold. The ECB is expected to cut interest rates again next week, which could provide some support for the U.S. dollar, creating a headwind for gold.
Economic data to watch next week:
Monday: Euro flash CPI estimates, US ISM Manufacturing PMI
Wednesday: ADP employment report; US ISM Services PMI
Thursday: European Central Bank monetary policy decision, US weekly jobless claims
Friday: US Nonfarm Payrolls.
