The spot gold price has gained 6 per cent this month after closing September in the high $730s. In just two months, gold has amassed 15 per cent in gains, up nearly 25 per cent so far this year. Analysts, however, say the market could be getting overheated and in need of a correction.
James Moore, analyst at TheBullionDesk.com, said in an e-mail update Tuesday that overbought chart signals and the scale of speculative longs established at quite elevated levels "does leave the metal vulnerable to a sharp correction lower."
He added that trade looks set to remain volatile with the market fast approaching $800/oz, and "could become extremely choppy should options related order be activated around the psychological level."
Jon Nadler of Kitco.com agreed, telling traders to "stay on the alert for another arm-wrestling session between the profit-takers and the buyers out there."
"This phase of the market action tends to result in plenty of excitement," he said, but indicated that gold may need a corrective phase before it can "resume a rally whose ultimate goal appears to be the all-time $850 high mark."
Dennis Gartman, editor of The Gartman Letter, said in Tuesday's Letter gold is now a stunning 94 per cent bullish in the market, and it has been above 90 per cent for the past two weeks. In May of 2006, during the previous peak, the gold market reached 92 per cent bullion and held above 90 per cent for only 10 business days.
Gartman, who sold half of his holdings in mid-October citing concern about the large level of public participation in the market, said he is happy to sit tight with one unit of gold for the time-being.
"We'll be interested in owning gold in greater size once it returns to the lower end of the well defined bullish channel ... something closer to $765 seems reasonable," he said.
Many economists believe the Federal Reserve is likely to cut interest rates again this week by one-quarter percentage point to 4.50 per cent in order to help the economy get through the stresses of a painful housing slump and credit crunch.
The Fed cut interest rates a half point on September 18, the first cut since 2003. Immediately after, the US dollar plunged below 80 on the dollar index for the first time in over 30 years and gold gained $9. The dollar was last trading at 76.784, down 0.52 on the index.
However, Nadler isn't so sure a rate cut would work in gold's favour in the longer term. He said "a short-term euphoric rally could soon turn ugly for various markets as stagflation fears could take hold." And stagflation occurs when the economy isn't growing but prices are.
"Our own opinion is that the Fed's decision may well be to stand pat on rates this time around and perhaps wait it out until December, as more economic data might be needed in order to convince its members that something needs - or not - to be done," he said.
On Tuesday, the Conference Board's index of economic confidence dropped to 95.6, the lowest since October 2005, from a revised 99.5 in September. The lower figure raises concerns that Americans may halt spending in the already slowing US economy.
However, perhaps more importantly, U.S. home prices fell nationwide in August for the eighth consecutive month, according to the S&P/Case-Shiller index. An index of 10 US metropolitan areas fell 5 per cent in August from a year ago - the biggest drop since June 1991. A broader index of 20 metropolitan areas fell 4.4 per cent in August over last year.
Moore said both oil and the dollar will continue to lend direction in the coming sessions as traders await Wednesday's Federal Reserves decision on interest rates. Oil prices, which have gained 50 per cent this year, 14 per cent in October alone, were last down $1.38 at $92.15.
He said the "anticipated rate cut" is likely to further weigh on the dollar which is currently straddling 1.4423 against the euro after reaching $1.4438 on Tuesday, the weakest since the European currency's debut in January 1999.
Spot gold is currently trading down $7.75 at $783.10 bid, after coming within $5 of the long-awaited $800 mark on Tuesday.
"Still, this remains extremely mild profit-taking and may well stall out near $775 with a relief rally to be expected, if indeed the Fed does accommodate on Wednesday," said Nadler.
However, Gartman noted that today's weakness is "sufficiently different from Tuesday's strength to suggest that the much needed correction has begun."
