Gold Has Icarus Moment

After hitting new highs, the metal reverses sharply, suggesting the start of a long-overdue decline.
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Updated from 12:57 p.m. EDT

Gold hit another 25-year high, peaking at $649 an ounce early Thursday. But it then plunged by more than $20 in morning trade in a move many are already calling the beginning of a long-overdue correction in metals.

Gold for June delivery, however, recovered some ground to close at $623.10 an ounce, losing $12.90, or 2%, on the session.

Among other metals, silver fell the sharpest, with the May contract losing $1.997, or 13.7%, to $12.52 an ounce, after hitting a 23-year high of $14.69 earlier. Copper, meanwhile, finished up 2.5 cents at $2.96 a pound on Thursday. It hit a new all-time high of $2.99 on Wednesday before falling back after news of rising supply.

Other metals were also falling sharply, with silver losing $1.23 to $13.29 an ounce, after hitting a 22-year high of $14.69 earlier. Copper was down $1.34 to $2.82 a pound -- after hitting a new all-time high of $2.99 on Wednesday.

The move coincided with a drop in crude oil. The June contract was recently losing 22 cents to $73.90 a barrel after hitting $74.50 intraday, a record high for Nymex trading. The downward move was attributed to profit-taking.

Crude has surged in recent weeks over rising tension concerning Iran's nuclear ambitions. Gold, which acts as both a hedge against inflation and a safe haven amid geopolitical jitters, followed suit.

Gold and other metals have also benefited from the weak dollar recently. Expectations that the

Federal Reserve

will soon stop raising interest rates have pushed the currency down. A weak dollar is bullish for most greenback-denominated commodities, such as gold.

But the dollar advanced on Thursday following an unexpected jump in weekly jobless claims.

Gold had gained $100 an ounce since early March without any meaningful pullback, and perhaps the very frothy levels were simply unsustainable.

"Oh yeah, we've been overbought for a while," says Tom Hartmann, a gold analyst and broker at Altavest. "It was just too frantic and frothy, and it screamed danger."

Hartmann remains bullish on gold and other metals, but says he wouldn't be surprised to see the yellow metal fall back to $600 or below before moving to new highs.

Similarly, Peter Grandich, editor of the

Grandich Newsletter

, believes that "classic signs of frothiness now abound in commodities in general" and that a "sharp 10% to 20% correction is lurking out there." (On Wednesday,

RealMoney.com

contributor

Chip Hanlon made similar comments, suggesting gold was in a "blowoff phase.")

Grandich also believes that gold can make a comeback to new highs later this year, identifying "heightened geopolitical concerns" as the No. 1 bullish factor, closely followed by expected weakness in the dollar later this year.

There was also some bullish supply news out of South Africa Thursday, even if it was largely ignored amid the general selloff. The Chamber of Mines of South Africa said it didn't expect gold production to recover in 2006 from the 80-year lows it hit last year, according to

Platts

.

Low production last year was due to the low price of gold in rands -- South Africa's currency -- as well as high oil prices and falling grades from some mines, it said.

Meanwhile, the stocks of metals miners were also pulling back sharply on Thursday. The Philadelphia Gold and Silver index was recently losing 4.9%, the Amex Gold Bugs index was down 5.6% and the CBOE Gold index lost 4.9%.

Some of the biggest gainers of recent weeks saw large losses on Thursday. South Africa's

Harmony Gold

(HMY) - Get Report

was recently down 7.8%, while

Gold Fields

(GFI) - Get Report

was down 7.5%.

Coeur D'Alene Mines

(CDE) - Get Report

was down 7%, while

RandGold

Resources

(GOLD) - Get Report

was down 6.7%.

Newmont Mining

(NEM) - Get Report

was down 4.1%, even as the world's second-largest gold producer

posted earnings that almost doubled from the year earlier and easily topped analyst estimates.

Steel maker

Nucor

(NUE) - Get Report

was also falling sharply after posting earnings that beat expectations and forward guidance that was in line with previous forecasts.

It posted first-quarter earnings of $2.42 per share compared with the consensus forecasts of $2.30. Nucor also said it expects second-quarter earnings of $2.20 to $2.40 per share, in line with the consensus forecast of $2.35.

Still, some were disappointed, especially as the stock had advanced 80% since the beginning of 2006. It was recently down $4.87, or 4.1%, at $113.9 compared with $66.5 on Jan. 1.

In a note to clients, Goldman Sachs analyst Aldo Mazzaferro said he had expected Nucor to post first-quarter earnings of $2.45 per share and second-quarter guidance of $2.80. However, he maintains a buy rating on the stock as he expects the company to boost its dividend and its share repurchase program. Goldman Sachs has an investment banking relationship with Nucor.

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback;

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