Following its best calendar quarter of gains since 1986, the gold price pulled back to end the month of March. In any bull market, there are “corrections” and periodic declines. This is only healthy and a natural consequence of trader behavior.
Trends Over the Long Term
One clear indication of how this up-and-down pattern works was the unexpected surge for gold prices after the new year came. The rise was so fast and consistent, most traders simply didn’t trust it. In fact, gold spot prices now exceed the average 2016 price predicted by all 31 members of the London Bullion Market Association (LBMA). According to Ross Norman, the CEO of historic British bullion company Sharps Pixley, “Forecasts made at the start of the year were out of date within weeks.”
In short, Bloomberg nails it on the head when it claims that “even the bulls got left behind” this year’s rally. Few foresaw how far the surge would carry before its first pullback. Based on inflows into gold-backed ETFs, the rally was almost nonstop: a mere eight trading sessions through the first three months of the year saw outflows from these funds.
This helped the sector reclaim virtually all of its losses over the preceding 18 months. It also came amid the highest trading volumes the world’s largest commodities exchange, the COMEX, had ever seen during the first quarter of a calendar year.
Charting a New Path
Now that the fantastic, double-digit percentage rally has taken place, two things have happened. First, many experts have wisely revised their expectations higher. Second, the correction has finally come. These dips in prices strengthen the longer outlook for the market: not only do they give bullish participants an opportunity for a bargain, but they ensure that positive momentum doesn’t become exhausted too quickly. To be fair, some analysts presciently saw the correction coming, if for no other reason than the prolonged duration of the rally. This dynamic is why technical analysts speak of “support levels”—when prices fall back to support levels, they typically bounce higher. By testing support, the dips provide a more robust trend going forward.
This shift is encapsulated by a report from gold analysts at Metals Focus. “While a further correction from the high point [year-to-date] of $1,285/oz is possible during the second quarter, this is expected to mark only a temporary setback before prices increase again in the third and, especially, fourth quarters.” As a result, Metals Focus places its fourth-quarter gold price at $1,350 per ounce.
There are other fundamental drivers that Metals Focus is bullish about. Both China and India, the two largest buyers of the metal in the world, are enjoying discounted premiums on bullion right now relative to their normal levels. Chinese buyers are seeing a minuscule $1.50 premium per ounce over the London spot price; typically it is several dollars above spot. The situation is even more favorable in India, where the government has been aggressively discouraging purchases of gold: Indian buyers are seeing $25/oz discounts on gold, according to financial analysts at Platts.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.