Is the Profit-Taking in Gold a Buying Opportunity?

The heavy sell-off in gold during Wednesday’s U.S. session was driven by profit-taking, according to several strategists, who tell CNBC they expect a bounce back in the precious metal as investors use the fall as a buying opportunity.

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Gold prices dropped 5 percent to below $1,690 an ounce on Wednesday, marking its biggest one-day drop in more than three years, after U.S. Federal Reserve Chairman Ben Bernanke dashed hopes offurther monetary easing.

“People are reading too much into Bernanke today and using it as a reason to take profits. I don’t think that we’re coming to the end when it comes to liquidity and quantitative easing,” Ed Ponsi, Managing Director, Barchetta Capital Management told CNBC.

In Thursday’s early Asian session, gold had recovered some of the losses, rising 1.4 percent.

According to Ponsi, Bernanke’s comments were used as an excuse for heavy profit taking in gold and the euro, something that was unlikely to continue.

“A lot of hedge funds are up more at the end of February than they were all of last year, so that’s a ripe situation for profit taking and overreaction.”

Nick Trevethan, senior commodities strategist at ANZ Research agrees that investors’ move to lock in gains before month-end was a significant contributor to the fall in gold prices. “The last day of the month was probably as significant as what Bernanke didn’t say.”

Matthew Grossman, Chief Equity Market Strategist, Adam Mesh Trading Group says Bernanke’s earlier pledge to keep interest rates at zero through the end of 2014 and the mixed economic data out of the country would continue to support gold prices.

“We’re not going to keep getting those rosy numbers in unemployment data and when that happens I bet people are going to be talking about, once again, is QE3 back on the table,” Grossman said.

For investors looking to gain exposure to the precious metal, Grossman and Trevethan say the overnight decline presents an attractive buying opportunity.

“This is a buying opportunity for many investors who were worried that the train left the station and they weren’t involved,” Grossman said.

Trevethan says his target for gold to end the year at $1800 an ounce is still on track.

“Prices are looking very attractive and we expect to see further rises in the market – a mix of short covering and bargain conscious consumers,” Trevethan said. “The broadly bullish longer term for bullion hasn’t changed.”

“We had seen gold trading at $1710-1760 for quite a period, last week we broke up out of that range. What we did yesterday was undo all of that, we pierced the bottom end of the trading range. But, it doesn’t look like it will stay that (way) for very long,” he added.