Gold Sentiment Bearish But April Lows Could Hold

(Kitco News) – Although near-term sentiment for gold prices has turned decidedly bearish, according to some analysts, current levels could hold.

The Comex June gold contract spent the entire week in negative territory and gave up most of its gains after April’s sharp selloff. However, prices managed to hold above the April low of $1,321.50 per ounce.

June gold ended Friday at $1,364.70 per ounce, down $22.20 on the day. For the week, prices dropped $71.90.

According to the Kitco News Gold Survey, out of 28 participants, 17 expect to see prices decline, two are neutral and nine expect to see higher prices.

George Gero, vice president and precious-metals strategist with RBC Capital Markets Global Futures, said there is so much negativity in gold markets that prices could be carving out a bottom. He said he is expecting gold prices to hold around $1,350 an ounce.

However, he added there is a lot of fear in the marketplace so people are not convinced that now is the time to buy.

“Bargain hunters are going to wait until the volatility dies down before they start buying again,” he said.

Jessica Fung, commodities analyst at BMO Capital Markets, said that she could see prices re-test the $1,320 area but she expects that price to hold in the near-term.

Although gold prices have been under significant selling pressure since April 15, Fung said the selloff was more of a price reset. She said gold at $1,600 looked a little overbought but is now trading near its fair value.

“It feels like we’ve reset,” she said. “There was a lot of speculation in the market. It was just a lot of froth driving prices higher.”

BMO Capital Markets is in the process of revising their second quarter expectations for gold prices. Fung said because of the shift in sentiment they are expecting prices to trade around $1,400, which is slightly lower than their previous expectations of $1,600.

Analysts at Credit Suisse have a stronger bearish outlook for gold prices. At a press conference in London Ric Deverell, head of commodities research at Credit Suisse, said they are expecting gold to trade at $1,100 an ounce and below $1,000 in five years.

He said the need to buy gold to preserve capital has dropped along with low inflation expectations and these will continue to drag prices lower.

According to some analysts the key to gold’s price continues to be exchange-traded funds.

Gero said redemptions in ETFs like SPDR Gold Trust (NYSE: GLD) has created a lot of supply in the market place, which, with the lack of demand, will take a while to work its way through.

Analysts at Deutsche Bank said since December more than 400 metric tons of gold from the ETF was sold w and the liquidation is about two-thirds of the way done.

“This implies another 2-4Moz of selling from SPDR or 3-5Moz of selling in aggregate in our view,” the analysts wrote in Friday’s weekly commodity report. “…liquidation could introduce further downside risk of up to USD75/oz in gold prices.”

Because of strong physical demand, Deutsche Bank analysts are expecting prices to hold around $1,300.

Fung said they are watching what some of the bigger hedge funds may do to see if gold will be hit with another selling wave. She said that according to media reports, John Paulson’s hedge fund, Paulson & Co. is still the biggest owner of SPDR Gold Trust and if he sells it could create another wave of panic selling.

“I think a lot of people are waiting to see if Paulson throws in the towel,” she said.

By Neils Christensen of Kitco News nchristensen@kitco.com

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