Gold prices are set for a correction in the coming months due to the re-emergence of risk-on sentiment, this according to Florian Grummes of Midas Consulting.
In a recent article published on Seeking Alpha, Grummes said that gold’s recent uptrend could see a trend reversal soon.
“In the coming weeks a rudimentary normalization after ‘Corona’ is expected. The easing rally in the stock market in the so-called ‘risk on’ mode could initially continue,” he said. “During such phases, gold is not needed and will most likely come under considerable pressure.”
Grummes noted that this would still only be a temporary correction for gold on its way to all-time highs.
“In the medium and long term, the distortions of recent weeks are therefore extremely bullish for gold and especially for silver,” the report said.
However, short-tem, any benefits from monetary policy stimulus have largely been factored in by the markets, the report noted.
“In the short term, the gold price has already begun to price in the enormous expansion of the money supply. The rise from US$1,451 to US$1,747 in just a few weeks reflects this,” Grummes said.
Though a complete trend reversal into $1,000 is unlikely, investors should brace for a correction into the $1,550 an ounce level before an inflection occurs, and gold continues its long-term upwards trajectory, he noted.
“A healthy relapse in the direction of US$1,350/1,400 would probably be the best thing for the gold price in the long term,” he said.
This does not mean, however, that investors should completely abandon gold, Grummes said; on the contrary, the yellow metal does stand to gain in the long-term horizon.
“In view of the completely ruined financial and economic system worldwide, you should still not give up a single physical ounce of silver or gold. This is your life insurance from now on. Nevertheless, we should be prepared for a major correction in the price of gold in the coming months,” he said.
Longer-term, gold prices are still set to climb towards the $1,800 an ounce mark, but current levels make a buy case difficult, the report said.
“Looking ahead over the coming days and weeks, a continuation of the gold rally up to my original price target of US$1,800 is still possible. However, the risk/reward-ratio is now extremely unfavorable at current levels. In addition, the first reversal signals are beginning to appear on both the daily and weekly charts,” Grummes noted.
Technically speaking, gold is already overbought, Grummes said.
“All in all, however, it is still too early to call a clear top in the gold market for the coming months. However, the probability of a trend reversal has increased significantly with the past trading week. Actually, it is quite possible that the impulsive uptrend has already come to an end at US$1,703 and that thanks to Corona we have been in an ABC correction pattern for over four weeks already,” he said.
Additionally, technical sentiment in gold is shifting towards bearish territories.
“Since the beginning of the year, the Optix sentiment barometer for the gold price has been delivering significantly increased levels of optimism,” he said. “The Gold Optix is again giving a sell signal, as optimism is currently way too high. Only when at least the beginnings of panic and fear spread among gold investors will there be meaningful and contrarian opportunity again.”