Gold’s biggest believers are beginning to have some doubts.
Many investors focused on gold seem certain that gold, which closed at a record $1,891.90 (U.S.) on Monday, will crack the $2,000 mark. But market bulls said they are preparing for a sharp decline of several hundred dollars, possibly very soon.
The ascent of the precious metal, which marked its third consecutive record high on Monday, has gone “parabolic,” with the price increasing exponentially, several analysts observed.
“Parabolic price surges … are not something with which an economist is particularly comfortable, unlike hedge-fund managers and short-term traders,” said DundeeWealth chief economist Martin Murenbeeld in a report to clients.
“Nothing goes up in a straight line. I suspect that there is one hell of a correction to this most recent surge in the not-too-distant future.”
Gold has climbed for 11 consecutive years and the pace of the rise has rapidly increased. Bullion is up nearly one-third since the start of July and, based on the past 13 weeks, is rising at an annualized pace of about 110 per cent. That compares with a climb of about 50 per cent in the past 52 weeks.
Much of the increase this summer can be attributed to anxiety about the global economy. The future of the euro as a currency was even in doubt, with investors questioning the health of such bulwarks as France. And the United States was mired in a political crisis about its debt and subsequent rating downgrade by Standard & Poor’s, sparking major stock-market declines.
As a result, some investors are seeking a haven in gold. The number of shares of exchange-traded SPDR Gold Trust, for example, have increased 7 per cent since July 1.
On Monday, gold rose 2.1 per cent, or $39.70, to $1,891.90 per ounce, as measured by the most actively traded futures contract, for December delivery, on the New York Mercantile Exchange. During the trading session the contract came within six dimes of $1,900. Monday’s gain comes on top of a 6.3-per-cent increase last week, gold’s biggest week since the depths of the financial crisis in early 2009.
Many eyes are on Jackson Hole, Wyo., where on Friday Federal Reserve Board chairman Ben Bernanke is to deliver a speech entitled “Near- and Long-Term Prospects for the U.S. Economy.” Analysts will be looking for hints about a potential third round of quantitative easing. Last August, it was at the annual Jackson Hole conference that Mr. Bernanke signalled what came to be known as QE2.
Quantitative easing, used when interest rates have already been slashed, effectively puts more currency in circulation to help the economy and create jobs as the Fed buys Treasury bills from investors. Gold bulls believe the perceived printing of money dilutes the U.S. dollar’s value, thus making alternates such as gold more valuable.
“Gold has been a wondrously profitable position to hold but a degree of caution is now in order,” Ross Norman, CEO of London bullion dealer Sharps Pixley, told his clients in a report on Monday.
“We are preparing levels at which to sell our gold positions – until it returns to a more sensible level … and then get back in. Let’s not be too greedy.”
Chart watchers have taken a particular interest in gold’s accelerating ascent. Axel Rudolph at Commerzbank AG believes that $2,000 gold is a certainty and that higher “fast spikes” are possible, but it’s unclear how the recent surge will play out. “It’s very difficult to know where the spikes are going to end,” Mr. Rudolph said.
Trader and newsletter writer Dennis Gartman was among those who said that gold is “parabolic,” adding that he had a “quite aggressively long” bet on the metal’s continued gains. He suggested gold could run for a further period, during which its rise may appear unjustified.
“This will end when it ends,” Mr. Gartman wrote on Monday. “There is really nothing more that can or shall or should be said.”
With a file from Bloomberg News