Gold Slumps Into Correction Territory as Bullion FOMO Fades — Barrons.com

By Martin Baccardax

Global gold prices slumped firmly below the $4,000 level in early Tuesday trading, dragging the bullion into correction territory and raising questions over its potential to reclaim recent highs into the end of the year and beyond.

Gold has fallen more than 10.5% from the record high of $4,355 it set last week, marking a seven day correction that has snuffed out one of the precious metal's longest bull runs in history.

Bullion prices surged more than 30% over the four months leading up to last week's record high, as well, with data from Bank of America's "Flow Show" report noting that inflows into gold portfolios over that time period outpaced total inflows tallied over the past 14 years.

Spot gold prices were down 1.3% at $3,927 an ounce on Tuesday, a level that still leaves it up nearly 50% for the year and on track for its best annual gain since 1979.

However, with U.S. stocks set to march higher over the coming weeks, talks with China like to elicit at least an extension of the recent trade truce between Washington and Beijing, and the dollar largely flat against its global peers over the past six months, the case for gold is starting to fade over the final two months of the year.

"The idea that the surge between early August and the middle of this month in the real price of gold could be justified by growing concerns about the 'debasement' of the dollar and the creditworthiness of competing U.S. 'safe' assets also just doesn't stack up," said John Higgins, chief market economist at Capital Economics.

"The upshot is that the 'debasement' theory looks like a misdiagnosis of the early-August to mid-October surge in the price of gold," he added. "The surge seems to have been fueled instead by the fear of missing out on a boom that may be turning into a mini-bust."

Ole Hansen, head of commodity strategy at Saxo Bank, argues that that case for holding gold remains, but notes that there will be debate as to whether to add to positions following this year's 50% surge.

"The next leg higher likely belongs to the year 2026, judging from past consolidation patterns — the last one in April lasted four months," he added.

BlackRock's Investment Institute, headed by Jean Boivin, thinks central bank buying will remain a "persistent factor" in boosting gold prices, and sees that bullion as a "tactical exposure in portfolios."

Central bank buying has also been significant, with China alone adding 39.2 tons to its overall holdings since it returned to the market in November of last year.

That could help provide a floor for overall prices as central banks are generally reluctant to sell their holdings, and many of the countries encouraging its import, like China and India, also make it difficult for investors to move offshore.

Gold-backed ETFs, meanwhile, are attracting billions in new investments, with overall additions likely to have topped 100 tons over the three months ending in September. That's more than triple the quarterly average over the past eight years.

Still, Capital Economics has reduced its price target on gold for the end of next year to around $3,500 an ounce.

"To be clear, we think that structural changes in gold demand will keep prices historically high," said Haman Hussain, climate and commodities economist at Capital Economics, citing demand from China and continued central bank purchases.

"However, the support from these tailwinds could start to weaken," he added. "The latest leg of the gold rally looks like a market bubble that is in its final stages."

Write to Martin Baccardax at martin.baccardax@barrons.com

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