How High Will Gold Bounce?

As gold continues its bounce off the late June lows, some investors are scratching their heads.  With at the margin improving economic data both in the US and Europe and notably rising bond yields, shouldn’t the trajectory or gold be lower given that it is not a big fan of economic growth?  While the simple answer may be yes, it is all about time-frames, while not forgetting the moves in the US dollar index.  First, as the US dollar index is roughly 2.50% lower since late June, and almost 4.50% lower since its recent peak in early July, gold, all else equal, had to rally to some extent just to keep true value.  Second, there is no rule that just because the medium trend in economic growth is up, gold can’t rally in the short-term.  In fact, given all the exogenous factors playing a role in the price of gold, it is highly likely to see a counter trend bounce at some point.  Thirdly, while gold demand has notably been in decline since 2011, recent reports of buying on parts of the banks may have sparked a little trend follower rally.

Allow me to be clear however that while I look at the recent rally as a bounce, I do think that in the medium term gold, as represented by the SPDR Gold Shares (GLD) exchange-traded fund is in a longer lasting bottoming phase, which would imply that the recent lows could well be re-tested and/or undercut before the ultimate bottom is in.  Please see my update on gold from August 5th HERE.

In the August 5th article I also said that ‘a break above the $129 area could result in a first move toward $135’ for the SPDR Gold Shares (GLD).  Well, yesterday, Thursday August 15th the ETF rallied past the $129 mark, which thus now puts $135 in play.

gld 12mnth chart

In the business of trading it is imperative that one be able to distinguish between time-frames in which price action as well as news and trends occur.  This is potentially even more important so for gold.


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