Gold investors who are feeling a little weak in the knees following Monday’s dramatic 9% price drop in the precious metal might take some comfort in the general sense that it has been wildly oversold.
“Usually, when these things correct, they overcorrect,” said Uri Landesman, president of Platinum Partners LP.
“I don’t know if the price of gold turns around (Tuesday), but at this point, it certainly looks like an overcorrection,” he added. “I was calling gold a great short when it was at $1,625 [an ounce], and my gut tells me it’s oversold here.”
While there are a host of macro-level justifications for a gold sell-off, most analysts were surprised to see such a stark move, which included gold falling to around $1,350 an ounce, from an intraday high of $1,600 just two weeks ago.
“I think the catalyst [for Monday’s sell-off] was probably the Cyprus central bank talking about selling its gold to pay down its debt, as well as Japan’s ongoing efforts to devalue its currency,” said Anthony Valeri, fixed-income strategist at
LPL Financial LLC.
“Also, after some disappointing recent performance, some investors might have decided this is a good time to rotate out of gold,” he added. “But at this point, we think it is deeply oversold, and we think the market is trying to establish a bottom here.”
Technical analysts focusing on various support levels pointed out that it was significant when the price fell below $1,540 an ounce after hovering for a while around that level.
The next support level to watch, which Mr. Valeri believes gold will hold, is the $1,350 range, or about to where it fell today.
“There’s still a lot in place to support gold,” he said. “We have low real interest rates, there is still a lot of demand for gold coming from Asia, and the global central banks are still in easing mode.”
For a lot of market watchers, the latest gold sell-off can be traced to speculation that Cyprus, along with a host of other ailing European nations, will start selling from gold reserves to pay down debt. That kind of flood of selling is seen as a major threat to gold prices.
More recently, the gold market and commodities prices in general are reacting to weaker economic data from China over the past few days.
“Right now, we’re dealing with the psychological aspect of the markets, because people see the price of gold going down, so they want to sell,” said Peter Schiff, chief executive of Euro Pacific Capital Inc.
“I think most of the people selling their gold now are probably selling at a loss because they’re probably the people who piled in when it was at $1,600, $1,700 and $1,800,” he added. “If people think this sell-off is sharp, just wait till you see the rally.”
From Mr. Schiff’s perspective, the market is overreacting, particularly with regard to the potential sale of 400 tons of gold by Cyprus or other struggling eurozone nations.
“The sell-off is based on a couple of false narratives,” he said. “The first one is that the U.S. economy is recovering and that the Fed policy worked, and the second is that European banks are going to sell all their gold.”
Mr. Schiff said that any sale of gold by countries such as Cyprus likely would not hit the market but instead involve a less influential off-market exchange that would move it from “weak hands to strong hands like China.”
“Anyone who bought gold as a hedge against the U.S. economy should know that it is still in the worst shape it has ever been in, because all we’ve done since 2009 is borrow and spend a lot of money,” Mr. Schiff said. “Instead of paying down debt and allowing the economy to restructure, the Fed gave us monetary heroin, and now they can’t stop it, because if they did, the whole economy would implode.”
