Tuesday, April 01, 2008; Posted: 02:12 PM
Gold's sharp decline Tuesday is still being viewed as a correction within a bull market, even though the metal has now posted two substantial single-day dollar declines in the last two weeks.
June gold has been as weak as $876.30 on the Comex division of the New York Mercantile Exchange after hitting a life-of-contract high of $1,038.60 on March 16. The metal at times was more than $40 lower on Tuesday, after a $59.10 sell-off on March 19, the day that the spot-month futures posted their largest one-day dollar decline since January 1980.
"You've got to bear in mind the spectacular nature of the rally" prior to the pullback the last two weeks, said Jim Steel, metals analyst with HSBC. "It's down only a little over 15% from the high. That's still a correction.
"The bull market is still intact, although I'm not saying we're going to go back to the highs. As far as I can tell, the bull rally in commodities in general has not ended," he said.
Additional U.S. interest rate cuts are likely to mean further dollar weakness, which tends to support gold, said Bart Melek, commodities strategist with BMO Capital Markets. Additionally, inflation remains a concern, particularly due to high fuel and food costs, and gold is often bought as a hedge against inflation.
"I see this as a profit-taking correction," Melek said. "My suspicion is the Federal Reserve is going to have to lower rates further. There continues to be a credit crunch in the banking system, and at the same time the U.S. economy is not doing well."
Economic data Tuesday showed that the Institute for Supply Management's headline manufacturing barometer rose to 48.6 in March from 48.3 in February, but remained below the 50 level generally seen as the threshold on whether the manufacturing sector is expanding or contracting.
Meanwhile, with the Fed appearing poised to cut rates again, the European Central Bank continues to show an inclination to "stay the course" and focus more on combating inflation instead, Melek said.
Also, Melek suggested the gold market "needs to look beyond" the dollar's relationship with the euro and also focus on China's currency, which has strengthened over the past year. "I see that trend continuing for some time," Melek said.
Additionally, more Fed rate cuts add fuel to inflation worries in the U.S., he said. And rising food and fuel prices mean cost pressures around the globe, he added.
"I think inflation long term will play a much bigger role than it did (previously)," Melek said.
Michael Gross, broker and futures analyst with OptionSellers.com, suspects the correction and consolidation in gold could continue for four to six weeks.
The dollar might recover some more in the short term, he said. If so, there could be more long liquidation of fund positions in gold and silver. Gross pointed out that the funds are still heavily net long in these metals.
"But I don't think the longer-term bull market is over," Gross said. "We remain somewhat bearish on the dollar over the longer term, which should support metals."
He added: "We think there is going to be a good buying opportunity in gold, probably over the next one to two months. We think it will be a good place for longs to come in and re-establish positions."
Charles Nedoss, senior account manager and metals analyst with Peak Trading Group, said he figures gold may have to rally somewhere in the neighborhood of $50 on a daily chart to really encourage the bulls to return to the market.
But, like others, he described Tuesday's sell-off as a profit-taking correction.
"If you look at the weekly charts and the monthly charts, the uptrend is still intact," Nedoss said. If the Tuesday low of $876.30 should fail, he said, there should be good support at a weekly uptrend line around $840.
"I don't think that you'll see that breached," he said.
It was "positive" that the funds reduced their net length considerably in the last reporting period for Commodity Futures Trading Commission data, Nedoss said. "And I'm sure you've had them come out of a lot of it today."
Analysts often note that a decline in net length means more potential buying waiting in the wings for future upswings.
The most recent positioning data from the CFTC showed that the large non-commercials trimmed their net length in gold futures and options to 190,663 contracts as of March 25, the first time it was below 200,000 since Christmas. It had been as high as 224,528 on Jan. 15.
-By Allen Sykora, Dow Jones Newswires; 541-318-8765; allen.sykora@dowjones.com
(END) Dow Jones Newswires
04-01-08 1412ET
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