Gold price enjoys 'safe haven' bounce, but still trapped

New York (Jan 5)  Predictions that the gold price would rise in the opening stages of 2016 were borne out in the first session of the year, as the precious metal enjoyed a strong 'safe haven' bounce.

Spot gold rose more than $20 an ounce at one point, from near its recent multi-year low to above $1,083, before retreating slightly. The price ended the New York session 1.3 per cent higher at $1,075 – and it edged up to around $1,077 in London this morning.

Gold is often seen a shore of value in times of market strain. Its rise came amid a major retreat across equity markets, which slumped in the wake of a dive on the main Chinese equity benchmark prompted by data showing a tenth consecutive monthly decline in manufacturing activity. The FTSE-100 fell 2.4 per cent, while the German Dax endured its worst one-day drop since August, with 4.3 per cent.

Other factors include a relatively subdued dollar, against which gold is a hedge, with the Financial Times noting it barely moved on Monday. Oil also rallied through most of the day – gold is also a hedge for oil-led inflation – caused by the latest wave of unrest in the Middle East, which itself will prompt general skittishness that would boost gold's appeal.

Finally, there is short covering by hedge funds which notes increased their bets last week on a falling gold price to the highest level since US regulators first began tracking derivatives data in 2009. As the price moved, institutional investors will have shifted positions to cover potential losses.

For all that, however, the gold price is still trapped in the range between $1,070 and $1,080 that has been its home for most of the past few months. Its failure to break out indicates a general view in the market that there are still fundamental factors that are likely to hold prices lower in the medium term.

These include waning demand for gold jewellery in markets such as China, a still-strong dollar and the potential for the greenback to rise more as interest rates are increased further in the US, which would also be a boon for income generating assets. The next rates' rise could be as soon as March, according to current predictions, which would be the next real test for gold.