Gold turns higher on ‘oversold’ condition

Gold futures slightly climbed on Tuesday finding support from what analysts see as an "oversold" condition. Gold has been "oversold" and was due for a bounce of some sort. Gold's gains came even as analysts at J.P. Morgan slashed the outlook for the metal in 2013.

By Myra P. Saefong and Barbara Kollmeyer
May 28, 2013, 12:32 p.m. EDT
Market Watch

SAN FRANCISCO (MarketWatch) — Gold futures climbed Tuesday, finding enough support from what analysts see as an “oversold” condition, giving up earlier declines on the back of dollar strength, gains in equities and reductions to the metal’s price forecasts.

Gold for August delivery GCQ3 -0.55% tacked on $3, or 0.2%, to $1,390.50 an ounce on the Comex division of the New York Mercantile Exchange after trading as low as $1,372.80. Floor trading was closed for Monday’s U.S. Memorial Day holiday.

Gold has been “oversold” and was due a bounce of some sort, said Fawad Razaqzada, technical analyst at GFT Markets.

“I like the fact that there’s so much negativity out there,” which makes a bounce more likely, he said.

“Financial speculators — especially retail traders, unfortunately — overleverage when they are convinced that the market will continue to move in the same direction because sentiment is overwhelmingly bullish, or bearish in the case of gold,” he explained. “So when the so-called ‘smart money’ starts to take the opposite view and thus cause prices to ‘unexpectedly’ move in the opposite direction ... traders are forced to exit in masse because they are overleveraged.”

That’s likely the phase gold is in now, “and more and more people are or are becoming negative, which is why I think a bounce is long overdue,” said Razaqzada.

Gold prices were trading lower earlier Tuesday as the U.S. dollar DXY +0.65% rose against key rivals, including the Japanese yen USDJPY +1.30% . The yen over the past three sessions had gained against the dollar on concerns about rising yields on Japanese government bonds, although the Bank of Japan has been trying to push yields lower to aid economic growth.

Dollar-denominated gold and other commodities usually move lower when the dollar rises as it makes them more expensive for holders of other currencies to buy.

Gene Arensberg, editor of the Got Gold Report, pointed out that the Commitments of Traders report released Friday, covering data for the week ended Tuesday, showed a “very high combined number of gross shorts” for both large and small speculators. Shorts are essentially bets that gold will fall in price.

“But if I were short gold, I would not be very comfortable knowing that, and would want my trading stop in tight in case a short-covering rally were to get under way,” he said. A short-covering rally “could be explosive at this point.”

For now, gold looks like it’s seeing more of a “corrective bounce from an oversold condition relative to the physical market,” said Arensberg. But “when the market fails to answer bearish fundamentals, it’s time to start thinking it is no longer bearish.” Price forecast cuts

Gold’s gains came even as analysts at J.P. Morgan Cazenove slashed the outlook for the metal in 2013 to $1,595 an ounce from the $1,745 expected previously. In the short term, the analysts cut the gold outlook 18% to $1,450 in the second quarter, while lowering the 2015 forecast by 5% to $1,650 an ounce.

Bank of America Merrill Lynch also cut its 2013 forecast on gold by 12% to $1,478 an ounce. The analysts said “higher growth, rising nominal yields and subdued inflationary pressure have all limited investor buying.”

Even so, the B. of A. Merrill Lynch analysts also said that while the gold bull market is “pausing,” they believe the “structural rally is not broken.”

They see several scenarios that could push prices higher, including more “affluent emerging markets” possibly increasing metal purchases to the extent that gold could trade at $2,000 an ounce — “even if investors bought only a third of the gold they purchased in 2012.”

Gold also turned higher despite a rally in stocks in Europe and Asia on Tuesday, and sharp gains on Wall Street.

Data Tuesday had helped to draw some attention away from gold. The U.S. consumer-confidence index climbed to a five-year high of 76.2 in May from an upwardly revised 69.0 in April, the Conference Board said Tuesday.

Separate data showed that U.S. home-price growth was the fastest in nearly 7 years, with the S&P/Case-Shiller 20-city composite up 1.4%.

Gold prices last week climbed about 1.6%, the best weekly performance since the week ended April 26, on the heels of weaker global equities and a decline in the dollar. Still, gold futures have fallen nearly 6% this month.

Elsewhere in the metals market Tuesday, July silver SIN3 -0.99% fell 8 cents, or 0.3%, to $22.42 an ounce. The J.P. Morgan analysts cut the forecast for the second quarter by 17% to $25 an ounce and lowered the full-year outlook on silver to $27.89 from $30.01.

In a note, B. of A. Merrill Lynch analysts said that while spikes on the back of technical short-covering are possible, silver looks set to average $24.40 this year, down 25% from their previous forecast.

July copper HGN3 +0.29% rose 2 cents, or 0.6%, to $3.32 a pound.

June palladium futures PAM3 +2.21% rose $31.40, or 4.3%, to $757.85 an ounce, while July platinum PLN3 +0.35% rose $8.70, or 0.6%, to $1,460.60 an ounce.

B. of A. Merrill Lynch analysts, who forecast a deficit in both platinum and palladium this year, said a rebound in demand from jewelers and auto-catalyst producers is likely to drive prices for the two metals in 2013.

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