Sun, 20 Sep 2020

Gold's rapid slump from a record is raising the question of whether the go-to haven has peaked or is just stumbling before making new highs.

Boosted by global stimulus measures to support a battered economy, negative real rates and a weaker dollar, the metal had surged more than 30% this year, surpassing the previous all-time high set in 2011. The rally -- one of the best among commodities -- prompted banks including Goldman Sachs Group Inc. and Bank of America Corp. to forecast that prices would keep climbing.

But after setting a new peak on Friday above $2 070 an ounce, bullion has since tumbled as much as 10% as U.S. bond yields rose, and on Tuesday alone slipped the most in seven years.

"I already thought last week that this will end in tears and so it happened," said Carsten Fritsch, a commodity analyst at Commerzbank AG. "This is over for now. We will consolidate for several weeks before making another run toward the record high."

Here are some charts that could offer clues to where gold goes next:

US yields

The slide in U.S. real yields into negative territory has been a key driver of gold's rally, with the metal becoming attractive relative to bonds. But a recovery in yields since late last week helped sour the sentiment in gold, especially with some indicators showing the metal trading at overbought levels.

Still, many of the reasons for owning gold haven't changed much lately. Real rates are historically low, the dollar remains weak and investors are worried about rising coronavirus cases and the impact that stimulus measures will have. Goldman Sachs has said that gold is the currency of last resort amid an inflation threat to the dollar.

Just a blip?

Gold's decline this week is also likely due to technical selling and profit taking. The 14-day relative-strength index had held above 70 for the past three weeks, a warning to some chart watchers that the market had become too hot.

The rally to $2 000 could have been an opportunity for many investors to decide to take profits, said Gavin Wendt, a senior resource analyst at MineLife Pty.

ETFs and futures

Bullion's ascent was accompanied by record inflows into exchange-traded funds, and while ETF holdings fell in the past few days, it's been a modest decline compared with prices. Net-bullish positioning on the Comex was largely steady in the six weeks to Aug. 4, and fresh figures due Friday may show how much of the recent selloff was driven by speculators.

"Investors that hold Comex positions react quicker to market developments, but as so many different investors hold ETFs they can also be quick," said Georgette Boele, a precious metals strategist at ABN Amro Bank NV.

Price outlook

There were plenty of calls for prices to climb higher before the recent decline. Goldman Sachs has predicted bullion will be at $2,300 in 12 months and Bank of America has forecast $3 000, while Saxo Bank A/S said the correction doesn't signal the end of gold's run.

Still, the metal has been prone to large corrections in the past after major rallies. For example, prices dropped between 10% and 20% during declines in 2011, 2016 and earlier this year.

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