In recent weeks, the gold market has been facing solid selling pressure, signaling a crucial test for investors, according to market analysts. After reaching all-time highs above $2,448 an ounce, gold prices have seen a correction, dropping to as low as $2,304.60 an ounce due to low liquidity and increased volatility.

Ole Hansen, a market analyst, noted that gold had been struggling to hold gains above $2,400 an ounce, leading some traders to start taking profits off the table. From a trading psychology perspective, such a move is expected, he explained. However, gold prices have since recovered during the North American trading session, with June gold futures last trading at $2,334.20 an ounce, down 0.52% on the day.

Hansen described the recent price action as a healthy and overdue correction, stating that it will help determine the true level of underlying demand beyond momentum and short-term focused managed money accounts. He highlighted initial resistance at $2,322 an ounce, and mentioned that a key Fibonacci retracement level between $2,255 and $2,260 an ounce is being monitored.

Despite the correction, there are several factors supporting the long-term bullish outlook for gold. Hansen pointed out that investors are still holding onto solid gains, emphasizing that the depth of the correction will depend on whether levels are broken that force hedge funds to reduce their net long positions. Meanwhile, geopolitical tensions, central bank buying of gold, and further demand from Chinese investors seeking to hedge against equity market weakness and currency devaluation continue to underpin gold's strength.

Hansen also acknowledged that the expected Federal Reserve rate cuts, which have supported higher bond yields and a stronger U.S. dollar, have become a secondary factor in the marketplace. Rising government debt in major economies is projected to support gold, as it raises concerns about overall debt levels and their sustainability.

Looking ahead, Hansen remains bullish on gold in the long term reaffirming that the breakout rally's underlying factors are still in place.

Please note that the views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The information provided is for informational purposes only and should not be considered as a solicitation to make any exchange in commodities, securities, or other financial instruments.