Gold prices drop back again after biggest fall in three years

SEATTLE (Scrap Monster): Gold prices were back in the red on Wednesday morning, giving up gains from earlier in the session, after a dramatic 5% plunge in the previous session.

Gold futures dropped 0.5% to $4,087.70 per ounce, while spot gold retreated 4% to $4,088.45 an ounce, at the time of writing.

"The catalyst appears to be profit-taking in a market that has been hugely overbought in recent weeks," ING analysts wrote. "Clearly, market participants were getting increasingly nervous over the sustainability of the uptrend."

The sharp selloff in the previous session was largely attributed to easing tensions between the US and China, but traders remain on edge ahead of delayed US inflation data and upcoming trade talks involving the US, China, and India.

Russell Shor, senior market analyst at Tradu.com, said: "Gold is likely to remain volatile in the near term after its steepest one-day drop in over a decade. Spot prices fell below $4,070 an ounce as traders took profits following months of record gains fuelled by Fed rate-cut bets, dollar weakness, and central bank buying.

"The sell-off appears to be largely technical, with profit-taking following an extended period of overbought conditions since September. Despite the pullback, bullion remains up roughly 55% this year, and the longer-term primary uptrend remains firmly intact."

Despite the dip, gold is still up 56% year-to-date, having reached a record high of $4,381 just days ago. The rally has been fuelled by strong central bank buying, geopolitical tensions, and growing expectations that the Federal Reserve may soon cut interest rates.

After Tuesday's decline, Citigroup downgraded its outlook for gold, moving from an "overweight" recommendation to a more cautious stance. The bank’s commodities research team, led by Charlie Masi-Collier, warned of an excessive concentration in long positions and suggested that gold prices may enter a period of consolidation around the $4,000 per ounce mark in the coming weeks.

"Old factors supporting gold, such as continued central bank purchases and diversifying away from the US dollar, may return later," Citigroup analysts said. "But at current levels, there’s no need to rush into buying, as prices have exceeded the rationale of the 'devaluation story'.'"

Courtesy: www.finance.yahoo.com