Well if nothing else it has been a somewhat interesting week in markets. One of the bigger questions likely being asked by investors right now is did gold in fact put in a bottom on Monday? While this remains to be seen, the market has seen a significant bounce after reaching an overnight low around the $1183 level. The recent rally in gold from that low has covered around $50 to the upside but is likely being fueled primarily by short covering. The bounce being seen in gold right now could also have a considerable amount of further upside to go.
As we had discussed in previous posts, the level of bearishness surrounding gold and precious metals had reached some extreme levels. This is not to say that gold cannot go lower and it may still, however, the market was simply due for a bounce and that bounce appears to have begun. This short covering bounce could potentially take the price of gold to the $1250s and then the $1275 area. At that point, we would quickly see if gold has fresh buyers entering the market or if the rally is simply sold into. Gold will remain a seller’s market until the bulls are able to prove otherwise.
This past week, the FOMC minutes were released and the Fed gave a fairly clear signal that short term rates will stay at very low levels for the time being. In addition, the Fed discussed dollar strength and concerns about a global slowdown. The dovish tone to their remarks caused a big rally in stocks, with the SP500 climbing over 30 points. This rally, however, may also have been based primarily on shorts getting squeezed. Stocks yesterday, however, gave the rally back and we are still left wondering if there is more downside to go in equities. Gold has thus far not shown much reaction to equity weakness.
We are in the midst of a risk-off period in markets that could possibly work to gold’s benefit. The notion of a global slowdown and geopolitical risks are helping gold try to stand its ground even as the dollar rises and energy prices continue their slide. The EU may still need additional stimulus measures in order to boost their economy, and the idea of further measures by the ECB may keep the Fed on hold with regards to rate hikes. The next several sessions in gold will be important. If gold can work its way higher, more shorts will likely get squeezed and drive prices higher. If gold rolls over quickly and approaches the recent lows again, the market could potentially head significantly lower and do so quickly.
