One day after hitting a fresh record high above $2,950 an ounce, the gold market is seeing solid selling pressure, and one bank is warning that prices have room to fall further.
The gold market has seen stalling momentum and higher volatility over the last two weeks, which Carsten Fritsch, Commodity Analyst at Commerzbank, said is a sign that it has run out of steam.
The comments come as gold prices initially dropped below initial support at $2,900 an ounce. Spot gold was last traded at $2,901.70 an ounce, and is down nearly 2% on the day.
Fritsch also noted that the makeup of investment demand is starting to change, as gold’s latest run has been driven by renewed demand for gold-backed exchange-traded funds even as speculative data shows some investors are taking profits on their bullish gold bets.
The Commodity Futures Trading Commission’s disaggregated Commitments of Traders report for the week ending Feb. 18 showed that money managers decreased their speculative gross long positions in Comex gold futures by 6,533 contracts to 222,538. At the same time, short positions rose by 2,941 contracts to 37,209.
The data show that speculators have been liquidating their long positions over the last four weeks, as gold’s net long positioning has dropped to a one-month low of 185,300 contracts.
“In view of the continued rise in the gold price to new all-time highs, speculative financial investors could have taken advantage of this by building up further long positions. Instead, they reduced their positions,” Fritsch said in his latest note. “Apparently, these investors consider the upside potential of gold to be exhausted, and are therefore taking profits. The rise in the gold price is thus being driven by fewer and fewer market participants.”
Speculative interest in gold has dropped as North American ETF demand has surged higher. Data compiled by the World Gold Council show that North America-listed ETFs saw inflows last week totaling 48.8 tonnes, valued at $4.6 billion. This was the biggest weekly increase since early April 2020.
Fritsch also pointed out that higher gold prices are weakening another major pillar of support in a key market. He noted that jewelry demand in India, the world’s top jewelry market, has slowed sharply due to higher prices.
“According to a government official, Indian gold imports in February are likely to fall by 85% year-on-year to 15 tonnes, which would be the lowest February level in 20 years,” he said. “We feel confirmed in our skepticism about the strong price increase since the beginning of the year and continue to expect a correction. However, it is impossible to predict the timing of this.”
Jim Wyckoff, Senior Market Analyst at Kitco.com, described the price action as regular profit-taking after gold prices rallied more than 12% within the first two months of the year.
He added that the selloff has not created any significant technical chart damage yet.
“A drop in April gold futures below strong chart support at $2,845 would produce near-term technical damage and begin to suggest a market top is in place,” he said.
Source: Neils Christensen Kitco
