Gold Hits a Wall at $1,200 With First Two-Day Slide in a Month

London (Feb 10)  Gold's rally is stumbling as demand slows during China’s Lunar New Year and analysts say prices have run up too quickly.

Bullion for immediate delivery headed for the first back-to-back drop in a month, sliding as much as 0.6 percent to $1,181.70 an ounce in London, according to Bloomberg generic pricing. Prices dropped since briefly topping $1,200 earlier this week. Holdings in exchange-traded funds backed by gold fell for the first time in 17 days.

Gold has beaten everything in the Bloomberg Commodity Index in 2016 as growth concerns fuel market turbulence and boosted demand for haven assets. But buying in China, which accounts for more than a quarter of gold jewelry demand, usually drops off as shops close for at least a week of holidays. Another sign that the rally is overextended: a measure of price momentum is now the highest since 2012.

“The rally is probably over for the short term,” Thorsten Proettel, a commodity analyst at Landesbank Baden-Wurttemberg, said by phone from Stuttgart, Germany. “There will be no support from China this week, and I can see prices drop to $1,130 or even further in the coming weeks.”

Gold, after posting its biggest rally to start a year since 1980, will drop this month as Chinese consumers slow purchases that surged before the start of the Lunar New Year, according to eight of 12 analysts surveyed by Bloomberg. Prices will reach $1,100, the average estimate from seven forecasts.

The metal’s 14-day relative-strength index, an indicator that tracks momentum, has climbed above 70, which indicates to some analysts that prices will fall. The last five times that gold exceeded this level, prices dropped 2.3 percent on average in the following month.

The odds of a U.S. rate increase by December are now less than 30 percent, according to data tracked by Bloomberg. Precious metals tend to fare better in a lower rate environment because, unlike other assets, they don’t pay interest.

Investors reduced holdings in gold-backed ETPs by less than 0.1 percent to 1,563.1 metric tons as of Tuesday, according to data compiled by Bloomberg.
•Silver dropped for a second day, falling 0.7 percent to $15.139 an ounce.
•Platinum fell 1.2 percent to $922.52 an ounce and palladium declined 1.2 percent to $510.50 an ounce.

Source: Bloomberg