They said gold prices could correct sharply, citing overvaluation. While that does not mean prominent bulls are now bears, they recommended investors take profit on gold holdings after the precious metal traded briefly above $1,900 on Tuesday for the first time.
Spot gold rebounded more than 1 percent to above $1,853 an ounce on Wednesday after sliding more than 3 percent in the previous session, its biggest daily fall in a year and a half.
Investors in droves have sought a refuge in bullion from a stock market meltdown, fears about sovereign debts in Europe and the United States and worries about a recession.
Gold gained nearly 9 percent in the six sessions before Tuesday’s fall and is up by more than $400 since July.
Independent investor Dennis Gartman, who has long been bullish on gold priced in non-US currencies, said he was reducing his long positions on gold in Euros and Sterling by a third on Tuesday and another third on Wednesday.
“Perhaps things have become a bit too frothy, and reduced rather than increased exposure seems reasonable and wise,” Gartman said.
Gartman said gold’s rally was not sustainable after SPDR Gold Trust’s total assets surpassed that of the SPDR S&P 500 ETF, making GLD the largest exchange-traded fund in the world for the first time.
A resurgence in investment demand has fuelled gold’s rally in the past decade, particularly during periods of global economic slowdown, growing from 4 percent of total demand for gold in 2000 to over 39 percent in 2010, according to Citigroup.
The bank also cautioned let alone a decline, in net investment flows can have a materially negative impact on the gold price from current levels.”
Wednesday’s bounce showed gold’s appeal is far from fading, however, as buyers picked up the precious metal after its sharp decline on Tuesday.
“It’s premature to call it a correction. But there is quite a bit of downside risk if gold breaks below $1,800 on a sustained basis. It may go lower to $1,700 or so,” said Ong Yi Ling, an analyst at Phillip Futures.
The current environment of low interest rates and a weak dollar remain supportive of gold prices, Ong said.
UBS metals strategist Edel Tully said the Swiss bank had “certainly noticed an increase in clients looking to book profits”, although she said this did not yet constitute a trend.
Tully cautioned that the risk of more margin hikes from CME Group was rising after the US commodity exchange hiked margins by 22 percent in August and the Shanghai Gold Exchange lifted margins twice in a month.
Michael Cuggino, portfolio manager of the $15 billion Permanent Portfolio Funds said, “Gold being as volatile as it is, it can go down in $100 to $200 and not really blink an eye.”
Cuggino said that investors should stay put and not add new gold positions at current prices, even though the metal is still a safe haven and an integral part of an investment portfolio in longer term.
Ashok Shah, chief investment officer at London & Capital advised, “Technically gold is very over-extended. If you are a short-term momentum player with a very short-term time horizon, yes, there is money to be made on the short side of the equation.”
“You could easily drop $200, $300 — that is not going to disturb the (long-term bull market),” he said.
Mark Luschini, chief investment strategist at Janney Montgomery Scott, a broker-dealer with $54 billion in assets, said that on charts, gold is vulnerable for a sharp pullback as it is trading at $400 above its 200-day moving average.