Tuesday, January 12, 2010

After Marking Time, Gold Slumps

As it turned out, the US$1,150 level held until the evening, being nibbled away at in after-hours trading. Although that level was breached twice last night, gold rebounded above $1,150 until a little after 6AM ET, at which it fell to a 1,146-1,148 range that's now been eroded on the downside. As I write this post, spot gold's at $1,145.10.

A Wall Street Journal Online report contains comments that are mostly bullish, riding on Sunday night's spurt-up. Today's drop was attributed to profit-taking, with the People's Bank of China's tightening action barely mentioned, and the earlier gain was attributed to recent weakness in the U.S. dollar. However, one quoted authority isn't ready to give up on the greenback just yet:

A period of dollar consolidation, though, could lead to range bound trading as gold faces significant resistances above current prices, said VTB Capital analyst Andrey Kryuchenkov in a daily report.

"In the shorter term, upside resistance is likely to hold at $1,170 at the start of the week, especially if we see consolidation on the dollar index."

Another report, from Reuters through MSN Money, attributes the recent weakness to action from the PRC's People's Bank of China. The central bank raised reserves requirements by 0.5% effective January 18th, which means that banks will not be able to lend as much on the reserves they have. Credit creation will slow, which will dampen money creation and inflation. The less inflation in the PRC, the less reason to hold hard assets.

How much that move will affect gold prices, all told, is unclear. The economy of the PRC is almost unique these days because it's overheating. There's no chance of serious tightening in the other major economies, with the possible exception of Israel and Australia. The drive to own gold in China is not meant as a hedge against inflation in the PRC; it's intended to hedge against further declines in the U.S. dollar.

Speaking of the greenback, the U.S. dollar index is also in a trading range after dropping last Friday and the beginning of this week. So far today, it's centered around 77.05. This Stockcharts.com daily chart of the greenback, which goes up to yesterday's close, shows yesterday's price breakdown as sticking out like the proverbial sore thumb:

I note that both techical indicators, graphed above and below the price chart itself, have worked. The relative-strength indicator fleshed out a top, and the MACD cross has foreshadowed a significant drop in the greenback. For a while, the MACD indicator - found at the bottom - didn't work; the cross had accompanied a trading range in the greenback. Had a trader sold the U.S. dollar index short in response to the cross-over, there wouldn't have been any profit to speak of (barring good timing) until yesterday. That lack of movement indicated a bull trend in the greenback. After yesterday, however, there's more reason for ambiguity.

The greenback is a long way from resuming its bearish trend, and (as noted above) it's currently stabilized. However, those expecting a repeat of the U.S. dollar's surge-ups in June and December of '08 aren't going to get it.

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