The technical breaks hit some emotional chords. John Hathaway, senior managing director of Tocqueville
Asset Management, blamed the drop on short-term technical trading. "Once
gold traded below roughly $1,650/oz, it showed vulnerability, which
encouraged aggressive traders to test support beneath," he said.
"The bigger question is the longer-term trend. While unnerving, recent
weakness seems to fit within the context of a long-run bull market. There are
a number of indicators to suggest this was a phase of extremely intense
liquidation, which typically sets the stage for a powerful advance. Of
course, only time will tell." He said "the fundamentals seem
stronger than ever," and added, "Therefore, we have not reacted to
the drop with any sort of tactical trading measures."
Meanwhile, Adrian Day, CEO of Adrian Day Asset Management, put the
downward movement in context. "We already had a weak backdrop, with a
steady decline in price since the exaggerated peak in September. With an
improving economy in the U.S. and a strong stock market, there has been some
switching from gold to equities and a growing sense that one does not need
gold in such an environment," he said. He pointed to a growing focus on
when the Federal Reserve's bond buying program might end, due to Fed Chairman
Ben Bernanke's comments that the economy is improving, and added, "In
such an environment, the market looks for negative news."
Day's reaction was to start
buying gold again as soon as it fell under $1,620/oz. "This area�$1,580�1,620�looks
like good support," he said. "More importantly, the fundamentals
remain positive," he added, referring to high unemployment and debt
rates and weak GDP numbers from Japan and Europe. "Yes, the stock market
has been strong, but the market could be spooked by the next Washington
spending showdown. Moreover, with retail investors putting money into U.S.
equity funds for the first time since mid-2008, this could be seen as a
contrary indicator; having missed the market doubling, are retail investors
putting in the top, as they often do?"
Day saw hedge fund gold sales
as "a positive contrarian indicator." He said, "Hedge funds
tend to move to where they see short-term opportunities. They could flow back
if, for example, the stock market drops on the Washington budget
stalemate."
Barclays analysts sounded a
more wary note. "The break below $1,625/oz in gold wrong-footed
us," analysts at Barclays wrote in a note to investors. "Below
$1,584/oz would target $1,525/oz before we look for a base. Falling volumes
with the move lower in gold warn of declining investor commitment," MarketWatch reported the
banker as saying, that if physical demand doesn't start to respond to the
recent pullback, "the floor for prices is set to become increasingly fragile."
At Deutsche Bank, commodity
strategists saw support for gold at $1,600/oz. "Furthermore, we believe
that on [a] 12-month timeframe," both gold and silver appear to offer
"compelling value," the strategists were reported as saying.
Dr.
Michael Berry, co-founder of Discovery Investing, wrote in Morning Notes on Friday,
"As competitive currency devaluations continue around the world and as
central bankers continue to accumulate gold and print fit currency to depress
interest rates, gold and silver and other precious metals, as well as hard
assets, must eventually appreciate in price." His conclusion is that the
price of gold either has or is likely to make bottom in the near future,
after an almost 11% decline from its $1,797/oz high last October. "The
leverage of the legacy producers will be very significant in the next year or
two."
He also saw the downward
pressure on junior mining companies as a positive for the physical gold
price. "Compounding the political pressures, the plight of cash-strapped
juniors could limit discovery," which he estimated to be a 10-year
process. "If this is the case within the next few years, there should be
significant upward price pressure on the metals in general and gold and
silver specifically."
Twenty analysts surveyed by
Bloomberg last week expect gold to fall next week, while 11 were bullish and
three were neutral, making the proportion of bears the highest since Dec. 30,
2011.
A Kitco News survey of 25 bullion dealers,
investment banks, futures traders, money managers and technical-chart
analysts showed that nine expected prices to go up, 12 predicted a decline
and four called for sideways price movement.
Many analysts are looking for
reaction from Asia this week after the New Year holiday. When the North
American markets return after their respective holidays, headlines about the
sequester and the release of Federal Reserve meeting minutes could also have
an impact.
Back at Tocqueville, Hathaway
concluded, "The lesson, which I believe will become evident in six
months or so, is that bull market shakeouts are designed to ensure that the
fewest number of possible participants will be aboard for the entire
ride."
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employees or members of their families, as well as persons interviewed for
articles on the site, may have a long or short position in securities
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