Friday, January 15, 2010

Another Downdraft Followed By Drift

Prior to the release of U.S. CPI data, the price of gold drifted downwards. After ending the regular trading session above US$1,140, and drifting up to the $1,145 level in evening trading, gold sagged to below $1,140 a few hours before midnight ET. A slump after 11 PM ET sent gold on its downdrift, which didn't end until the price bottomed at around $1,129.70 right after 6 AM ET. Since then, gold has recovered somewhat prior to the release of the CPI data: as of 8:23 AM, spot gold was at $1,133.00.

This Wall Street Journal report points to the stronger dollar as the cause. The U.S. Dollar Index did strengthen overnight; all this morning, 77 has served as a support level aftter the Index bulled past it last night. The traders quoted in the WSJ report were neutral to mildly bearish.

A Bloomberg report fingered the greenback as the cause:

“It’s the dollar move driving prices,” said Afshin Nabavi, a senior vice president at bullion refiner MKS Finance SA in Geneva. “There’s some light bargain-hunting” when prices fall below $1,130 to $1,140 an ounce, he said.
Therein also is the results of a survey: "Twelve of 19 traders, investors and analysts surveyed by Bloomberg, or 63 percent, said the metal would rise. Five forecast lower prices and two were neutral."

As the U.S. inflation data came in, with a lesser-than-expected December rise of 0.1%, gold didn't react all that much at first: right after the data was released, spot gold was at $1,134.70. However, after the news was disseminated and assimilated, spot gold slumped: as of 8:41 AM ET, the metal was priced at $1,131.10. The U.S. Dollar index slumped briefly, but moved upwards to a new daily high of 77.28 before backtracking. What's interesting about the reaction is that both the greenback and gold have vaccilated after the inflation report. A half-hour after the release, spot gold was at $1,133.10; at 9:17 AM, it was $1,134.80. In retrospect, the overall trend was been slightly bullish for the U.S. dollar and slightly bearish for gold - as is consistent with the lower-than-expected raw rate of 0.1% - but inconclusive beyond the very short term.

The Physical Gold To GLD indicator, which is calculated by dividing the price of an ounce of gold by the price of one share of GLD, clocked in at 10.20 - slightly below the long-term average. It's a crude indicator, with only one signal: when it falls below 10 - when one ounce of physical spot gold sells at a discount to 10 shares of GLD, which represent one ounce - then gold's likely to move higher. As of yesterday's close, the indicator has not sunk below the 10 threshold. [A graph, courtesy of, is found here. I refrain from moving beyond the crude interpretation because this blog is not intended to give market-timing advice.]

This raw gold chart, also courtesy of, shows that the recent price has coalesced around the metal's 50-day moving average:

It also shows that gold is in a trading range, moving with little conviction on each side. Chart-watchers may see a regular head-and-shoulders pattern in early January's action, with a neckline just above $1,125. This pattern suggests that, if gold falls below $1,125, it will fall with conviction. Of course, given that a larger reverse head-and-shoulders pattern was recently busted, that smaller one can be treated with some skepticism. One interpretation: if the price falls below $1,125, then there'll be another downward stampede like the one that busted the larger pattern.

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