By Allen Sykora
Gold futures are falling back on profit taking and some scaling back of the safe-haven premium previously wound into the market on the back of the Russia-Ukraine crisis.
Nevertheless, some traders and analysts are calling the pullback a “healthy” correction and pointing out that the geopolitical tensions surrounding Ukraine have not gone away and could still offer some underpinnings to the market.
As of11:12 p.m. EDT, gold for April delivery was $15.40 lower to $1,357.50 per ounce on the Comex division of the New York Mercantile Exchange. At the session low of $1,351.10, gold had retreated 3% from the six-month high of $1,392.60 hit in electronic trading early Sunday night.
“We’re all well aware that we’ve seen a pretty significant safe-haven premium built into this market on the back of the crisis in the Crimea and Ukraine,” said Dave Meger, director of metals trading with Vision Financial Markets.
Residents of the Crimean region voted in a hastily called referendum Sunday night to leave Ukraine and join Russia, with the vote drawing objections from Western nations, particularly considering Russia’s military presence in Crimea. On Tuesday, Russian President Vladimir Putin said his country did not plan to seize any other regions of Ukraine.
“You’re seeing a bit of that safe-haven demand pulled from the market,” Meger said.
“Remember, markets are always forward-looking,” he added about the previous run-up in prices. “We (market participants collectively) felt that we had a good handle on the situation in the Ukraine and where we might go from there.”
Now, he continued, the market is turning much of its immediate focus to the Wednesday outcome of a two-day meeting of the Federal Open Market Committee, with expectations that policy-makers will continue to scale back the bond-buying program known as quantitative easing.
“Obviously, the safe-haven (buying) in gold was acute last week when the market was worried about what would happen in the Ukraine,” said Phil Flynn, senior market analyst with Price Futures Group. “It seems to be easing off a little bit because it doesn’t seem like it’s going to turn into a violent event at this point.”
Flynn said prior to this week’s pullback, gold posted one of its strongest starts for a new year since the early 1980s, running up nearly 16% to the high.
“It might even be healthy for the bulls to get a bit of a correction here,” he said.
He later added, “you’re seeing some profit-taking and you’re seeing some stops get hit. But I don’t think you’re seeing a major change in the trend. I think it’s just a correction after what has been an almost historic run-up in the gold market.”
Kevin Grady, president of Phoenix Futures and Options on the Comex floor, pointed out that considerable speculative net length has been added to the gold market in recent weeks. For instance, the net-long position (number of bullish contracts minus bearish ones) for money managers rose to 123,007 lots for futures and options combined as of March 11 from 34,104 as of the end of 2013, according to weekly data released by the Commodity Futures Trading Commission.
“With the tremendous long position here, people are starting to take some profits,” he said.
The area around $1,400 an ounce is acting as significant resistance, plus physical demand had softened lately at higher prices, he pointed out.
Further, first-notice day for the April futures is approaching at the end of the month. This means futures traders who do not want to take delivery must either exit or roll forward their positions to a future contract month. As they see selling, some may be simply opting out of the market, Grady continued.
“But it’s healthy for the market,” he said. “The market is not just going straight up. It gives the market some time to correct. Also, you want to see some buying below the market and where the support actually is.”
He listed his chart support around $1,347.50 to $1,346.Flynn listed “other reasons to be bullish beyond the geopolitical headline of the day.” He pointed to ideas that stocks might be due for a correction after an “incredible tear” to the upside, meaning some may look to the precious metal as a hedge against any equity weakness. Also, whereas the Asian physical market has been described as softer in recent weeks, he looks for this demand to pick up as problems in emerging-market economies continue to simmer. Flynn also cited one potential risk to the continued Fed tapering that most analysts expect – maybe at some point policy-makers will become more concerned about the impact on emerging markets in turn spilling over into the U.S.
And, while there might be some relief that the Ukraine-Russia situation has not turned violent, “anybody who thinks the situation…is over right now may have another thing coming down the road,” Flynn added.
Grady said investors may keep eying gold as a safe haven because of both the Ukraine-Russia worries and new fears surrounding China, including softer economic data and the country’s first corporate bond default.
“The fact those two things are still looming out there…will give you a floor to the market,” he said. “Even if they hit this thing and some people liquidate longs, at strategic price levels, you’ll see people coming back in and some buying.”
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