Possibility of a Gold price correction is rising

The gold price traded lower on Tuesday, sinking $14.50 to $1,883 per ounce, after the Shanghai Gold Exchange hiked margins to 12%. Gold price turned lower following the news out of China after hitting a new all-time high of $1,913 overnight.

Commenting on the gold price rally, analysts at Wells Fargo wrote in a note to clients that “Investors’ concerns about the validity and efficacy of the U.S. debt deal, uncertainty about further deficit reduction suggestions … continued dollar weakness and the worsening of the European debt crisis all appear to have helped push gold even higher. While gold appears to be getting a bit frothy, its ascent is justified by the fundamentals.”

While Wells Fargo may be correct about the fundamentals supporting the gold price, the yellow metal could be due for a correction in the short-to-intermediate term. Market Vane’s Bullish Consensus reading on the gold price, a closely-followed sentiment indicator, came in at 93% on Monday. Such a high level has historically been associated with intermediate-term peaks in the price of gold and has frequently served as a warning sign, from a contrarian perspective. Given the speed of the recent rally, the possibility of a Gold price correction is rising as investors look to bank profits.

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