“We see short covering and some bargain hunting, coupled with signs of some physical demand in China,” David Govett, the head of precious metals at Marex Spectron Group in London, wrote today in a report. “The market is still limited on the upside” as traders await the Fed meeting, he said.

Eoin Treacy's view

The macro environment for gold has changed over the last 12 months. During the previous decade the weakness of the US Dollar, increasing consumer demand, particularly in Asia, deep investor reservations about the direction of central bank policy and its impact on the value of fiat currency, the advent of gold ETFs, declining ore grades and the rising cost of mine production all helped to support higher prices. The net effect was 10 years of positive returns for gold.

However, as the potential end of QE is considered, the outlook for the US Dollar is less dire than many previously considered. Massive investment has helped to stem the decline of mine output while ETF Holdings peaked and continues to decline. Following this year’s earlier decline, the imbalance between supply and demand may have returned towards a relative equilibrium.

It has been our view that following its steep decline gold has probably entered a support building phase. $1200 represents an area where demand has reasserted dominance on two occasions, with today’s upward dynamic following last week’s upside key day reversal, breaking the six-week progression of lower rally highs. A clear downward dynamic would be required to question current scope for an additional rebound. However, a sustained move above the 200-day MA, currently near $1370, would be required to suggest a return to demand dominance beyond the short term.

Today’s bounce was shared by the other precious metals. Platinum in particular is worthy of mention not least because it has been ranging for longer than the other precious metals. Platinum has been ranging with a mild downward bias for nearly two years and bounced from the region of lower boundary again today. A sustained move above the 200-day MA, currently near $1450, would begin to suggest a return to medium-term demand dominance.

The NYSE Amex Gold BUGS Index may be in the process of posting a failed break below 300. Additional upside follow through tomorrow would bolster that view and open up the possibility of a reversionary rally back up towards the still declining 200-day MA.