Who Says Gold Can’t Bounce?

The question on most every commodity trader’s mind is this: Where to next? With Chinese equities continuing their freefall, global demand is tanking. This has impacted on international trading and commodities markets are among the hardest hit of the lot. But one commodity in particular has bucked the trend – gold. Of course itshould be remembered that gold has one of the most curious relationships with equities markets, interest rates and dollar strength. As equities take a turn for the worse, so gold becomes the darling of the market. What we are seeing now is dollar strength (bad for gold), equities weakness (good for gold) and a postponement in interest rate hikes (good for gold, for now). If the rate hike takes place in September, binary options traders would be correct in placing put options – since rate hikes make gold less attractive. But this option has been postponed, meaning that call options on gold are the flavor of the day.

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How is Gold Performing?

During the last trading session on Friday 21 August, gold hit a high of $1,168 p/ounce. That is the same price point that gold was trading at when it was at its peak 2 years ago. Gold has since retreated to $1,153 but this level is a ways above the low of $1,080. China is the elephant in the room, and gold is showing once again that’s it got plenty of bounce when the going gets tough in equities markets. Gold has always been a safe haven asset and this time around the pressure is on forwhat looks like an extended session of turbulence. Of course there are provisos and caveats. The proviso is that interest rates must not rise and the caveat is that capital disinvestment in commodities will hurt gold demand.

Short positions on gold hedge funds may be reduced and this will fuel the gold price rally. For traders wondering at what point we can confidently gauge a turnaround in the gold price, I would have to say that anywhere in the $1,200 region upwardsis a safe bet. The problem is that profit taking kicks in before that level and this will drive down the price. Based on the current state of affairs in China, we can anticipate short-term bullish sentiment with gold – great for call options – but intervention by the regulatory authorities will likely stem the rout and restore a semblance of normalcy to the Chinese exchanges.

How high will the Gold Price Rise?

Earlier last week, Stan Druckenmiller took out a big position on gold with SPDR Gold Shares ETF (GLD). At the time, few people thought that the turnaround was anything more than pie in the sky – but by Friday the bulls were charging. Over the past week and a half, the gold price has rallied by as much as 7%. As it stands, gold looks likely to stay above $1,100 p/ounce and move upwards of $1,200 p/ounce in the short-term. As we can tell from current market trends, sellers are in short supply and buyers are charging in. Now thatshort sellers are buying back gold, the market is rallying as the domino effect kicks in. Precisely when this precious metal will retreat remains unknown, but my gut feel tells me that we can expect key support levels around $1,100 and $1,130 to holdfor some time. Anything over $1,200 is on the cards, given current market conditions.