Gold bulls in retreat after spectacular plunge

Investors should question gold as a safe haven
Investors should question gold as a safe haven

Gold got whacked in the Asian trading session on Monday, plunging below $1,100 in for the first time since March 2010, and strategists say the precious metal is only headed lower from here.

The precious metal's latest leg down was reportedly triggered by speculative selling in the Shanghai Gold Exchange, catching investors off guard.

"It was down to speculation here, someone taking advantage of the low liquidity environment," Victor Thianpiriya, commodity strategist at ANZ, told CNBC. "Around 5 tonnes of gold was sold on the Shanghai Gold Exchange within the space of two minutes between 09:29 and 09:30. The daily volume last week was about 25 tonnes," he noted.

Gold slid over 4 percent to as low as $1,086 an ounce in early trade on Monday, before paring back some losses over the course of the day. It was down 2.3 percent at $1,107 at around 12:00 SG/HK time.

"It clearly wasn't driven by fundamentals, because the U.S. dollar didn't move at that time," Thianpiriya said.

Bulls concede defeat

Akos Stiller | Bloomberg | Getty Images

The disappointing performance of the yellow metal, which is down 6.4 percent on a year-to-date basis, has sent gold bulls into retreat.

Jonathan Barratt, chief investment officer at Ayers Alliance, a longtime gold bug, says he's turned "neutral" on the metal.

"As you know I've been a bull, [but] I've got to go neutral now. Gold's broken through some very critical areas. From a technical perspective it doesn't look hot," said Barratt, who expects price could fall back to $1,100 or lower.

Technical analyst Daryl Guppy also warned of "bearish features" on the gold chart: "There is a higher probability of a future fall below $1,150 and a continuation of the downtrend towards historical support near $980."

Next stop for gold?

With the Federal Reserve's first rate hike looming and the prospect of a stronger greenback, the odds remained stacked against gold, say analysts.

"I think there's further downside on the price once the dust settles and the focus shifts back to U.S. dollar strength and the interest rate outlook," said Thianpiriya. "The risk of it hitting $1,050 is clearly elevated."

He's not alone in expecting gold isn't going higher any time soon.

"Wherever you look, there really is no support for the precious metal," said Howie Lee, investment analyst at Phillip Futures, who has been targeting gold to hit $1,100 since the start of the year.

"Developments in China, whether in terms of central bank buying or jewelry demand, are simply not sufficient to keep gold prices at high levels," Lee said.

This expert is now neutral on gold
This expert is now neutral on gold

Gold faced another downdraft after China ended years of speculation about its official gold holdings on Friday, revealing an almost 60 percent jump in its reserves since 2009. The country's central bank said its gold reserves were 1,658 tonnes (53.31 million fine troy ounces) as of the end of June, the Financial Times reported. In April 2009, reserves were 1,054 tonnes.

Analysts said the buildup was smaller than expected.

While there may be a lack of catalysts for gold, Lee doesn't expect the precious metal to fall much further from current levels.

"The pace of gold's decline means that prices may eventually react little when rates are officially raised – regardless, gold is expected to bleed further in the short term; any recovery looks very unlikely," Lee said.