Thursday, January 21, 2010

Drop Not Over Yet

After yesterday morning's rout, gold spent the rest of the day drifting just above $1,110. Early this morning, the decline continued. After drifting up to $1,118.60 shortly after 2 AM ET, gold resumed its fall; the price got as low as $1,099.60 before turning around. However, the $1,100 support level held. After reaching that low, the price drifted upwards. As of the time of this post, spot gold's at $1,106.50.

Gold was pushed down in large part by the greenback, which continues to vault upwards. About the same time that gold hit its nadir, the U.S. Dollar Index reached 78.813. That level makes for a four-month high: the greenback hasn't been above 78.8 since early September of last year. The Kitco Gold Index shows that gold's decline was only partially the reflection of the U.S. dollar's rise, but the rising greenback is clearly the force pushing gold down.

Gold bulls may take comfort in the fact that, when the U.S. dollar index was last above 78.5 (Sept. 7th), gold was at almost exactly $1,000. Even after its recent rout, the metal's still 10% above that September greenback-parity point. Of course, a gold bear can interpret this fact in another way.

The featured analyst quoted in this Wall Street Journal Online report is cautious, sounding even near-term bearish:

"European Union debt issues and the technical breakdown in the euro look set to apply further pressure in the coming session, with gold potentially correcting back to the $1,050 area," said James Moore, an analyst at

"The scale of investment demand should continue to limit the impact of the stronger dollar with both metals set to maintain their upwards trend," TheBullionDesk's Moore said.
Another one called for a trading range between $1,100 and $1,150 in the near term.

That report, plus one from Reuters, both ascribed the drop in gold (and the rise in the greenback) to Greece-related worries in Euroland, pushing the Euro down vis-a-vis the U.S. dollar. The Reuters report also notes that the Euro fell because a Eurozone purchasing managers' survey got a result that was lower than expected. The gold experts quoted therein were more sanguine, such as this one:

"Bullion should continue trading against the U.S. currency, tracking the broader market," VTB Capital said in a note. "We see our key support holding at $1,090 in case we lose more ground."
The report also noted that the SPDR Gold Trust's holdings were unchanged yesterday, and that Indian gold sales are picking up. "'Yesterday's sales were highest in the month,' said a dealer with a state-run bank."

Despite such sanguinity, the rising greenback is going to keep putting obstacles in front of a gold resurgence. As this daily chart of the U.S. Dollar Index shows, the currency is on the move - upwards:

Admittedly, the recent drop made the earlier resurgence iffy. However, there's now a higher low and higher high on the daily chart. The MACD index at the bottom is crossing over onto the bullish side. What's relevant about that indicator is that someone following it on the bear side - selling short when the shorter-term exponential moving average (black line) crossed below the longer-term one (red line) - would be losing money right now, just before the black line rose above the red one. If that indicator is a money-loser on one side of the trade, it confirms the first-sight judgment that the other side matches the trend.

The weekly chart shows a long-term higher low:

but not a higher high as of yet. It's true that a higher-low-higher-high pattern established in late '08 was broken last year, and that the rise that began last December has been more hesitent than the one that began in July of '08. However, the recent hesitency might well indicate a solider rise.

Believe it or not, the gold-at-a-discount indicator didn't even get close to the trigger level yesterday. This indicator, which is the price of gold divided by one share of GLD, spent the day between 10.17 and 10.48. [Daily chart, courtesy also of, here.] When it falls below 10, physical gold is selling at a discount to its equivalent in GLD shares. That hasn't happened so far in this latest decline. I should note that the indicator did dip below 10 on November 26th, which did not mark a significant low; only a near-term one. That exception is the only one in the last five months. A weekly chart shows that a lower number, although occurring less frequently, is less ambiguous. The three-year low was below 9.0, reached around September 10th of 2008. This indicator is intended to be a timing aid to a regular accumulation plan, for which the decision to deploy capital has already been made. It is not intended to influece the decision to deploy new capital. Using the daily figures, the indicator sinks below 10 about once a month.

The jobless claims have been released, and disappointed by showing a higher number than expected. The latest weekly figure was higher than the previous, confounding consensus expections for a drop. This datum had little effect on the price of gold, which is still drifting upwards after the test of $1,100. So far, yesterday's rout has not been repeated. Perhaps the bears are taking a nap.

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