Gold Slips from $1,000 Record, Analysts Question "Overblown" Gold Futures Jump

Gold retreated below $1,000 an ounce in early London trade on Monday, drifting 1% from last week's record New York close as the US Dollar bounced on the currency markets and all other asset classes ticked lower together.

Crude oil fell below $69 a barrel, while Asian stock markets averaged worse than 1% losses.

Germany's Dax index dropped 0.9%, unwinding the last two days of gains.

The Dollar knocked two cents off the British Pound and one cent off the Euro, helping to hold the Gold Price above £600 and €685 an ounce respectively.

Both US and German government bonds also fell, pushing the yield offered by 10-year Treasuries up to 3.37%. Ten-year Bund yields rose to 3.25%.

"Although we remain bullish on Gold, upward momentum might fade," says Standard Bank in Monday's Commodities Daily, pointing to data released after Friday's close by US regulator the Commodity Futures Trading Commission.

Speculative betting by hedge funds and other non-industry players in Gold Futures jumped last week, driving up their "net long position" of bullish minus bearish bets by the equivalent of 161 tonnes week-on-week, according to Standard's maths.

"[That's] the largest weekly rise in the speculative position in at least two years. At the same time, the net long speculative positions have risen to 40% as a percentage of open interest – also the highest in more than two years."

"We recommend that nimble investors take profits on any long gold and silver positions, looking to re-enter after a correction," agrees UBS metals analyst John Reade in a note to clients, widely reported on the internet.

"Considering the speed of the increase, and on the absolute level, of the net speculative position, we are cautious about the near-term outlook for the Gold Price.

"Customers remain positive about the longer-term prospects...but are concerned that speculative positions are a little overblown."

Overall in the week to last Tuesday evening, CFTC data show, the total number of open contracts in US Gold Futures and options leapt by almost one-fifth, the biggest week-on-week increase since gold broke through $400 an ounce in the fall of 2005 according to BullionVault analysis.

Bullish contracts held by hedge funds and other speculative, non-industry traders rose to 92.9% of their total betting on gold, rising well above the 5-year average of 82% but remaining below the all-time peak of Oct. '07.

Back then, Gold began a six-month surge – spurred by the Federal Reserve slashing US interest rates as the first wave of bank failures approached – that took it from $720 to $1,032 an ounce.

Over on the other side of the gold derivatives market, meantime, commercial traders acting for gold industry players last week raised their bearish betting above three-in-every-four contracts held, just surpassing Oct. '07 and the highest level since Jan. '06.

That month the Gold Price began a 36% jump to the May 2006 spike at $725 an ounce.

"Gold is still above its 12-month moving average, and there is not quite the frenzy of public interest and buying you would expect to see at a top," notes technical analyst Martin Pring of the eponymous Pring Research in a note.

"Nevertheless, I am a bit suspicious [of gold's run to $1,000] since the Dollar isn't breaking down, and usually the Dollar and gold go in opposite directions."

"When a can is placed on a stove burner, the pressure builds up inside the can," counters Richard Russell, author for the last five decades of the much-respected Dow Theory Letter. "At some point, we know not exactly when, the can will explode and the pressure will be released.

"That, I believe, is where Gold is."

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Adrian Ash runs the research desk at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern and FT Deutschland; Italy's Il Sole 24 Ore, and many other respected finance publications.

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