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Analysts Remain Mostly Upbeat About Gold's Prospects Despite Wednesday Sell-off
01 March 2012, 10:08 a.m. By Allen Sykora
(special thanks to CaptWhizbang)

(Kitco News) - Analysts are retaining a generally upbeat tone on gold’s longer-term prospects, citing a continued low interest-rate environment in developed nations and generally referring to Wednesday’s sharp retreat as a “correction” rather than the start of something more ominous.

In fact, some say the rally since the start of the year had been fueled in large part by short-term speculative buying. And now that some of these speculators exited positions Wednesday, there is more ammunition on the sidelines to help gold rise again.

However, some also said, much may hinge on whether physical buyers in the Far East—who previously had been described as quiet for much of the new year—use the pullback as a buying opportunity.
Gold for April delivery got up to around $1,792 an ounce each of the last two days on the Comex division of the New York Mercantile Exchange, and the market was watching to see if it could breach psychological and chart resistance around $1,800 and just above. But then came seemingly innocuous congressional testimony on the U.S. economy from Federal Reserve Chairman Ben Bernanke Wednesday. Numerous pundits blamed the sell-off on the fact he did not hint at any further quantitative easing, when many had been expecting more such hints. Other commodity and equity markets also fell and Treasury yields rose.

“The positive take was that the Fed sees steady improvement in the data and that further stimulus may not be necessary,” said A.L. Waters Capital in its daily report to clients. “Still, it seemed that investors were a little bit shaken to think that the U.S. economy could, perceivably, be taken off life-support and left to stand on its own.”

Some, however, say gold’s sell-off may have been exaggerated as sell stops were triggered and many speculators who had bought on the rally in recent weeks started exiting en masse to either capture profits while they had them or else avoid losses.

“Yesterday’s price development makes it quite clear that the previous rise in prices had been driven mainly by speculation,” said a research note from Commerzbank. Analysts added: “We do not regard the price slump as sustainable and anticipate that the upswing will recommence soon.”

UBS precious-metals strategist Edel Tully pointed out that Bernanke’s remarks were not all that different than at his Jan. 25 press conference. She listed three factors for the extent of Wednesday’s retreat: “$1,800 was proving to be too much of a hurdle and a certain staleness had entered the market; positioning had increased very swiftly in recent weeks; and physical demand has been non-existent of late.”

The net length of the large non-commercial accounts, generally referred to as the funds, had increased to 201,637 as of Feb. 21, according to the most recent Commodity Futures Trading Commission report, an increase of 48% since Jan. 3.

Much will hinge on whether physical demand picks up, particularly after this week’s decline, analysts said. Such buyers often wait for prices to stabilize after a sharp correction before jumping back in, Tully said.

“We expect prices below $1,700 to attract decent interest from this sector,” she said. “Any signal pointing to a floor being near should offer some comfort to nervous investors. If physical buyers shy away, gold will be at risk of further losses.”

George Gero, vice president and precious-metals strategist with RBC Capital Markets Global Futures, looks for gold to stabilize, although he also said it could take some time to absorb the selling that came into the market. He pointed out that some central banks are still looking to gold for their foreign reserves.

Roughly 1 ½ hours into Thursday’s Comex pit session, April gold was basically steady--down just a dime to $1,711.20 an ounce.

“Yesterday’s selling still has to be absorbed,” Gero said. “After that, I think it will be back to basics. I think it was a major correction and we’re staying in an uptrend as long as we don’t break this $1,700 area….”

Analysts So Far Considering Decline Only A ‘Correction’

Afshin Nabavi, head of trading at MKS Finance, described himself as not giving up on gold. Should support hold around $1,700 to $1,675, this would provide a buying opportunity, he said.

“I think this is a very healthy correction,” he said. “A lot of people were waiting on the sidelines hoping for a move like that (so they could buy again).”

Mike Zarembski, senior commodities analyst with optionsXpress, said he was encouraged by the price action in the early going Thursday, with an absence of heavy follow-through selling so far. Much of Wednesday’s sell-off was technical in nature, he said, with the triggering of protective sell stops, which are pre-placed orders triggered when certain chart points are hit.

“Is this the start of the end of the gold upward trend? I tend to doubt it….I don’t think anything has changed economically,” Zarembski said. “The global economy is flooded with funds. I think the market may have over-reacted to Chairman Bernanke’s testimony yesterday, fearing that the easing policies are done for now. I don’t think he really said that at all. It (more easing) may not happen in the next weeks or months, but I don’t think the Fed is completely ready to throw in the towel on further easing, should the economy start to falter.”

Zarembski pointed out gold has been moving mostly straight up since the start of the year without a meaningful correction. “Unfortunately, it all happened in one day,” he said. “But I think it was just a correction that will probably end up restoring some health to the bull market.”

After Wednesday’s decline, Barclays Capital said it is retaining its forecast for gold to average $1,700 in the first quarter and $1,875 for the full year.

Gold still faces some near-term hurdles, such as bouts of dollar strength, broad risk reduction and profit-taking, Barclays said. However, Barclays said the pullback is a “healthy correction and, in our view, the broader macro back drop remains gold-favorable given the negative interest rate environment, longer-term inflationary concerns and lingering sovereign-debt uncertainties.”

Wednesday’s steep price decline was “difficult to stomach” for bulls, said UBS’ Tully. “But it doesn't change our core positive view on gold. What could test that view is whether markets start to really price in the possibility of the Fed raising rates before the current 2014 window. Wednesday's testimony from Bernanke didn't move that needle. But for gold, it is one of the potentially severe downside threats.”

Otherwise, she said, expansion in the balance sheets of the Bank of Japan, European Central Bank, Federal Reserve and Bank of England is a reason to remain bullish on gold, as well as the pick-up in inflation expectations, rising energy prices, an underlying good physical-demand story and currency debasement. “We don't think those factors have changed in the last 24 hours, and positioning now is certainly much cleaner after yesterday's washout.”

By Allen Sykora of Kitco News; [e-mail]

http://www.kitco.com/reports/KitcoNews20120301AS_gold.html