Gold investors at several firms said that gold prices could correct sharply, citing overvaluation. While that does not mean prominent bulls are now bears, they recommended investors take profit on gold holdings, after the precious metal traded briefly above $1,900 on Tuesday for the first time.
Spot gold [XAU= 1846.96 17.31 (+0.95%) ] quickly recoiled to end down more than 3 percent on Tuesday, its biggest daily fall in a year and a half, having advanced by almost 8 percent in just the last three sessions and by more than $400 since July.
Independent investor Dennis Gartman, who has long been bullish on gold priced in non-U.S. currencies, said he was reducing his long positions on gold priced in euro and sterling terms.
"Perhaps things have become a bit too frothy and reduced rather than increased exposure seems reasonable and wise," Gartman said.
Gartman said gold's rally was not sustainable after SPDR Gold Trust's [GLD 177.67 -6.92 (-3.75%) ] total assets surpassed that of the SPDR S&P 500 ETF, making GLD the largest exchange-traded fund in the world for the first time.
"Such things senseless happen after periods of euphoric rises in prices of some markets," Gartman said.
In a note on Tuesday, UBS Metals Strategist Edel Tully said that the Swiss bank "has certainly noticed an increase in clients looking to book profits."
Tully also cautioned that the risk of more margin hikes from CME Group [CME 250.37 11.15 (+4.66%) ] was rising, after the U.S. commodity exchange raised margins by 22 percent earlier in August.
Buy the Rumor, Sell the News?
Investors in droves have sought a refuge in bullion from a stock market meltdown, fears about sovereign debts in Europe and the United States and worries about a recession.
Fund managers said the metal was bid up as an inflation hedge on expectations of further U.S. monetary easing, and bullion could sell off if Federal Reserve Chairman Ben Bernanke does not announce a new bond-buying stimulus program at an annual Fed conference in Jackson Hole, Wyoming on Friday.
"There is some potential degree of 'Buy the rumor, Sell the news' on any future Fed policy that may come out at Jackson Hole. Investors might want to have that on the back of their minds as well," said Michael Cuggino, portfolio manager of the $15 billion Permanent Portfolio Funds.
"Gold being as volatile as it is, it can go down in $100 to $200 and not really blink an eye," Cuggino said.
Analysts said anything short of a third round of quantitative easing would likely provide limited support for gold as the Fed had already vowed to keep interest rates low into 2013.
Cuggino said that investors should stay put and not add new gold positions at current prices, even though the metal is still a safe haven and an integral part of an investment portfolio in longer term.
Mark Luschini, chief investment strategist at Janney Montgomery Scott, a broker-dealer with $54 billion in assets, said that on charts, gold is vulnerable for a sharp pullback as it is trading at $400 above its 200-day moving average, a sign of overbuying.
"From a purely technical standpoint, I think it'd be wise to take some chips off the table," Luschini said.
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