Why gold's 3% dip may help fuel a run to fresh record highs

By Myra P. Saefong

Gold posts biggest 2-day percentage loss since Feb. 2023

Gold futures on Tuesday tallied a two-session decline of about 3%, with the largest such loss in over a year. The big question is whether the pullback has been sharp enough to provide a fresh opportunity for investors who missed out on the metal's climb to record highs.

Weakness in gold is partly due to "diminished risk of an outright war between Israel and Iran, which therefore reduced the haven appeal of gold somewhat," said Fawad Razaqzada, market analyst at City Index and FOREX.com, in emailed commentary.

Gold for June delivery (GC00) (GCM24), the most-active futures contract, fell $4.30, or 0.2%, to settle at $2,342.10 an ounce on Comex Tuesday, posting lowest finish since April 4.

Prices also lost $67.40, or 2.8%, to settle at $2,346.40 on Monday, lifting the metal's two-day percentage drop to 2.97%, the worst two-day stretch since Feb. 3, 2023, according to Dow Jones Market Data. Prices based on the most-active contract had last settled at a record high on April 19.

The big question now is whether the roughly 3% drop in gold prices on Monday and Tuesday are enough to shake off what some analysts and traders saw as overbought conditions, and are the declines enough to allow prices to run back up to record highs.

Working off 'overbought' conditions

Razaqzada said he had been calling for a bit of a pullback in prices ahead of that development, mainly due to the face that gold prices have become "extremely overbought" from a technical point of view - and that needed to be "worked off."

He said he was also concerned about the continued sell off in the bond markets, which was pushing up Treasury yields - in turn, increasing the opportunity cost of holding non-interest bearing assets, such as gold.

The yield on the 10-year Treasury BX:TMUBMUSD10Y was trading 8.9% higher month to date in Tuesday dealings, and up 17.9% for the year so far, FactSet data show.

Han Tan, chief market analyst at Exinity, told MarketWatch that gold's declines still have "more room to run into sub-$2,300 waters, as markets unwind geopolitical risk premiums."

A "healthy technical pullback was also overdue," he said.

Central bank purchases

Prices "overshot the underlying narrative, despite the shopping spree by central banks and the elevated potential gains, especially once the [Federal Reserve] can officially kick off its [interest] rate-cut cycle," said Tan.

Gold demand from central banks totaled 1,037.4 metric tons in 2023, which was just below the record high set in 2022 at 1,081.9 metric tons, according to the World Gold Council.

Read about investors taking cues from near-record buying by central banks.

The market has seen "unprecedented demand" for physical gold by central banks east of Germany, said Jan Skoyles, head of marketing at GoldCore, in a YouTube video posted Tuesday. Central banks have been the biggest buyers of physical gold.

Brazil, Russia, India, China and South Africa have purchased almost 5,000 metric tons of gold for their official reserves in the last 15 years, she said.

The rise in China's gold purchases, meanwhile, has coincided with a sharp fall in its officially-reported holdings of U.S. Treasury securities, Skoyles said. "The world is increasingly becoming less dollar reliant."

Read: Gold buyers are holding on to the precious metal as prices break records - and are ready to buy more

This move up for gold is "more than just a statement about the perceived weakness in the U.S. dollar," she said. The "real trade is gold against the yen and euro, and the U.S. dollar strengthening against these currencies," she said.

Central banks see this and are "diversifying and they are protecting themselves with gold," said Skoyles. "Do we expect this continue? Yes we do."

What now?

So is gold still considered "overbought," and is it too late to buy the precious metal?

Razaqzada said he now believes that gold prices are no longer overbought as they were a couple of weeks ago.

With prices back to his first "downside target" of around $2,300, he said he is "no longer too confident we will see an even deeper correction." He's also "confident: that his longer-term bullish view on gold "remains intact."

Razaqzada expects to see fresh record highs in the "not-too-distant future" for gold but for now, the key question is what happens next and has gold "formed a near-term top or was that just a small dip before we see new records broken?"

Gold bears would argue that "yields are still elevated and the probability of a rate cut in June by the Fed has been slashed," which should keep the U.S. dollar supported and buck-denominated precious metals under pressure, he said.

The gold bulls, on the other hand, would point to the fact that gold has previously ignored the strength in the U.S. dollar and Treasury yields, so they may say that this trend will resume, now that prices are no longer technically overbought, said Razaqzada.

He said he would look for a bullish signal to emerge around the current price levels to "suggest that a low is in place."

Gold is now "testing the short-term bullish trend line and the first major short-term support" around $2,300, he said.

If gold does not show any bullish price action around $2,300, give or take $10 or so, then we could see a "deeper pullback towards the next key level of support around the $2,222 area," Razaqzada said.

Prices haven't fallen to that level since late March.

Once spot gold "fully clears the froth from its surge since March, this may present a buying opportunity for bullion bulls to capitalise on potential gains."Han Tan, Exinity

Once the "spot," or current price, for gold "fully clears the froth from its surge since March, this may present a buying opportunity for bullion bulls to capitalise on potential gains, especially since the Fed can official kick off its rate-cuts cycle," said Exinity's Tan.

-Myra P. Saefong

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04-23-24 1454ET

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