Bulls Fret Gold Rally May Be Done
Although gold on Tuesday clawed back above $1,650 an ounce, some professional traders are concerned that the precious metal's steep correction may not be over yet.
As 2012 came to a finish, gold barely managed to stretch its bull market rally into a 12th year. Still, some bulls are beginning to sweat over bullion's overall trend.
The yellow metal suffered a deep sell-off in the wake of minutes from the Federal Reserve's November meeting, which sounded a surprisingly hawkish note on inflation risks -- fears of which have helped underpin gold. The Fed's minutes suggested policymakers were becoming increasingly concerned over the impact of loose monetary policy on financial markets.
(Read more: Why Divisions at the Fed Have Markets So Puzzled.)
Successive rounds of quantitative easing, or money-printing to buy bonds, have been a primary driver of higher gold prices in recent years. Those fears normally put upward pressure on long-term interest rates, fueling fears over inflation.
Yet the perception that the central bank was becoming divided on whether to continue its push for cheap money sent shudders through the market, traders said -- and muddled the outlook for gold.
"It's not inflation we're worried about, but deflation, and that's why gold is acting like a currency," said Rich Ilczyszyn, founder of iiTrader. He noted the U.S. dollar rose and the price of gold fell on news the Fed may end QE early, which suggests investors could be less nervous about rising prices.
Ilczyszyn said he's selling the February gold futures contract at $1,665 with a stop of $1,670 and a price target of $1,645. If gold breaks a new monthly low of $1,626, he will get short. With this trade, Ilczyszyn is risking $500 to make a potential $2,000.
Professional trader Anthony Grisanti also said the winds might be changing for bullion.
"I've always been bullish on gold, but when those Fed minutes came out and you saw the dissension in the ranks, gold reacted by selling off almost immediately," said Grisanti, founder of GRZ Energy. "So now, I think the consensus has changed down here."
Instead of buying any dips in the price of gold, Grisanti said traders he's talked to are now using any rallies to sell the precious metal.
"They're afraid the Fed's going to end QE before the end of 2013 and they don't want to get caught," Grisanti said.