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The gold market is starting a new trading week on the back foot as the U.S. dollar continues to find new buyers.
December gold futures last traded at $1,942 an ounce, down 0.26% on the day. Meanwhile, the U.S. dollar index last traded at 93.15, roughly unchanged on the day.
Gold's selling pressure comes after it was unable to hold $2,000 an ounce last week.
According to some analysts, after an historic drive since the start of the year, gold has entered into a necessary consolidation period. Analysts have said that they see this as a healthy correction that will help gold maintain its long-term uptrend.
In a recent interview with Kitco News, Ole Hansen, head of commodity strategy at Saxo Bank, said that new momentum in the U.S. dollar could be gold's most significant headwind in the near-term.
Last week speculative bearish interest in the U.S. dollar fell slightly after hitting its highest level in nine years. Hansen said that this trend probably has more room to unwind.
"We are seeing dollar short positioning at extreme levels and these positions right now are squeezable," he said. "That makes bullish gold position squeezable in the near-term," he said.
While gold looks vulnerable to lower prices in the short-term, many investors wonder just how low they could go as it trades near critical support levels.
In a report on Sunday, Christopher Vecchio, senior currency strategist at DailyFX.com, said that it will be important to watch if gold prices can hold initial support at $1,921 an ounce, the yellow metal's previous all-time high, set in 2011.
"Gold prices failing through the former yearly high at 1921.07 would be a major warning sign for gold bulls," he said.
After that, Vecchio said that investors should keep an eye on the August lows.
"A loss of the August low at 1862.90 would be a very important development insofar as redefining the recent consolidation as a topping effort rather than a bullish continuation effort," he said.
In a recent interview with Kitco News, Daniel Ghali, commodity strategist at TD Securities, said that the gold market could see a considerable correction as the momentum trade, which carried prices above $2,000 an ounce, starts to fade.
He added that there could still be room for prices to go higher, but he compared the price action to a rubber band being stretched.
"The rubber band is really being stretched to the limit and some point it's going to give and then we will see some pain."
As to how significant the correction could be, Ghali said that a drop of 17% or more than $300 could be possible. However, he added that once the correction is over, he expects that the fundamental issues that ignited gold's rally, should continue to support prices.
Some analysts have said that gold prices could fall as low as $1,800 an ounce and remain in a long-term bullish uptrend.
By Neils Christensen
For Kitco News
