Gold Loses Some Luster From German Court Ruling; Analysts Expect Shine To Return

A German court ruling that lets the country take part in European bailouts has lessened the need, and price, of gold temporarily. Experts say people will flock back to gold as a safe haven investment because debt problems have not been solved and growth remains slow.

07 September 2011, 12:44 p.m.
By Allen Sykora Of Kitco News
Kitco

(Kitco News) - Strength in equities and a German court ruling that lets the country take part in European bailouts have lessened the need for gold as a safe haven, at least temporarily, and prompted selling to exit positions in which traders previously bought.

Still, as during past pullbacks in a long-running bull market in gold, analysts look for investors to use the retreat as a buying opportunity since sovereign-debt problems have not been cured and the U.S. economy remains anemic.

As of 12:27 p.m. EDT, December gold was $53.70, or 2.9%, lower at $1,819.60 an ounce on the Comex division of the New York Mercantile Exchange. The tumble comes one day after it hit a most-active-contract record high of $1,923.70.

Any uptick in sentiment for the euro zone can detract from any safety flight into gold in the short term, said Adam Klopfenstein, senior market strategist with MF Global. And, several analysts said, this is just what occurred when Germany’s high court upheld the country’s participation in past bailout efforts for some European nations and establishment of the European Financial Stability Facility, although the ruling also said future bailouts require parliamentary approval.

“There had been a fear the court might rule otherwise. So you have higher equity markets, with Europe very strong and markets here very strong,” said Bill O’Neill, one of the principals with LOGIC Advisors.

The Dow Jones Industrial Average was around 200 points higher.

Frank Lesh, analyst with FuturePath Trading, also cited the German court ruling, but added that a technical-chart influence was gold’s inability to keep pushing upward when it hit its most recent record high early Tuesday. “It was a signal to people to take some profits,” he said.

Then on the retreat, the move accelerated when sell stops were triggered to kick traders out of long positions, he said. Stops are pre-placed orders activated when certain chart points are hit, meant to help traders capture a profit or limit a loss.

“Gold has been an asset class with a lot of bullish themes. But it has been extended because of those bullish themes,” Klopfenstein said. “So the slightest change in posture in the thoughts of worldwide investors could cause major drops…When people want to jump out into the exit at the same time, it can cause these moves.”

Volatility in gold has clearly picked up, with the market in a range of roughly $1,705 to the $1,920s over the last two weeks, O’Neill said. This acts as a “warning sign” for more two-sided trade rather than a one-way trip higher, he said.

“That shows there are some traders who have taken a more cautionary approach, feeling that it’s gone up so much that it’s due for a significant setback,” O’Neill said.

Still, O’Neill looks for gold to remain in a longer-term uptrend and eventually top $2,000 an ounce.

ANALYSTS SAY BULL RUN NOT OVER

While gold could dip some more in the near term, other analysts also do not see the sharp retreat as the start of the end to the bull market.

“I think this will probably extend itself to the downside a bit more,” said Dave Meger, director of metals trading at Vision Financial Markets. “But on a larger scale, I still believe the overall fundamentals remain in place. I think there will be the need for safe-haven assets moving forward…Long term, nothing really has changed.”

Gold may have put in a temporary top, but $1,800-an-ounce metal technically “does not damage the structure of gold,” Lesh said.

“We’re still looking for higher prices,” Lesh said. “The world’s problems have not been solved. The fear of the European debt problems remains, and the fear of a weaker economy in the U.S. remains.”

Even thought there may have been a short-term alleviation of fears in the euro zone, the continent’s ongoing issues will not be fixed “by one or two meetings or bailouts,” Klopfenstein said. Meanwhile, investors continue to fret over whether the U.S. is teetering toward a double-dip recession.

“So I believe there will be pent-up buying demand that will re-emerge on these price breaks in gold,” Klopfenstein said. “People not (currently) in gold are licking their chops, hoping gold will go slightly lower so they can enter the market again.”

Lesh suggested the increased volatility lately has made gold a “trade” more than a “hold” for now, at least for futures.

“Having said that, I think people will let the market settle down. And when it looks like there is a base or we’ve found some support to the market, I would expect buyers to come back in,” he said.

Klopfenstein described the Swiss National Bank’s move on Tuesday, in an effort to cap Swiss franc strength against the euro, as ultimately supportive for gold whenever safe-haven buying does re-emerge.

“The fact they’re going to hold their currency at 1.20 (francs) to the euro removes one of the major flight-to-quality investment ideas,” Klopfenstein said. “If you take away the Swiss franc, that means more people have to focus on gold if they want to fly away from risk-based assets.”

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