Gold Marking Time

The $1,085 floor established yesterday afternoon didn't hold, being fallen through at about 7 PM ET. The drop, however, was less than 5 dollars an ounce; $1,080 held except for a brief spike downwards early this morning. Two attempts to rally above $1,085, one at 10:30 last night and the other at a little after 3 AM ET, stopped. The latter one got gold briefly as high as $1,087 before running aground. Since that point, gold's been in the $1,080-$1,085 channel.

The U.S. Dollar Index made its daily (and five-month) high of 79.155 late last Thursday, at about the same time when gold descended to its present range. That level was almost bettered at 3 AM ET, when it reached 79.116. That rise was enough to turn the then-advance in gold into a decline, which briefly got the metal's price below $1,080. Since then, the greenback fell back somewhat, ending just after 4 AM ET, and has been rising slightly since. As of 8:16 AM ET, gold has climbed slightly above its range and has been credited by the Kitco Gold Index with a $1.00/oz rise due to predominant buying.

This Bloomberg report credits the U.S. dollar's rise for gold's slump, with no other news to account for it. Two traders are quoted to that effect:

“Speculators are still liquidating gold, with no physical buying in sight,” Andrey Kryuchenkov, an analyst at VTB Capital in London, said today in a report. “Bullion is still trading on the back of swinging currency markets.”...

“Further gains in the dollar would keep gold on the defensive,” said Toby Hassall, an analyst with CWA Global Markets Pty in Sydney. “Prices are finding support at the level of December’s lows.”

The report also mentions the results of a straw poll: 11 out of 22 traders said that gold would decline next week. That liquidation has evidently been in the futures market, as the SPDR Gold Trust's holdings were unchanged again yesterday. Platinum continues to be popular while gold's popularity is languishing.

A Wall Street Journal Online report attributes gold hanging around the December low to weakness in the euro, which has been reflected in U.S. dollar strength. Also mentioned as factors are continual weakness in other commodities and the stock market. The two experts quoted therein were more optimistic than the ones Bloomberg quoted:

"The precious metals have been holding well despite the whole market being massively under pressure, especially the base metals," said Eugen Weinberg, a commodity analyst at Commerzbank. "It points to a pickup in demand after a price drop."

[Gold's] lower prices are enticing buyers in China, India and the rest of Asia, analysts said. But they add that buying won't be enough to offset the absence of speculative investors and retail investors in exchange-traded funds, who have shown little appetite for gold at the moment.

There's a certain irony in the fact that rising physical demand would be seen as insufficient to boost the gold price. However, it does explain the refusal of gold to stay below $1,080 for long.

This six-month chart of the Kitco Gold Index shows a difference in the January rally with respect to the previous one:



This chart is scaled to place the Kitco Gold Index (KGI) value at exactly the same point as gold itself at the start of the chart as of the end of July. (The gold price is right-scaled; the KGI is left-scaled.) As is evident from the chart, the Index price is higher than the gold price itself at the point corresponding to yesterday. Also evident is, during the early January rally, the gold price didn't get as far above the KGI price. That relative lack of difference reflects the greenback's recent strength.

What's clear from the chart is, after November's rocketing turned into December's rout and January's indifference (all told), gold has been pushed up higher when the U.S. dollar is factored out. The rise in the KGI isn't spectacular - more than 14% - but it is there. Also of note is the fact that the KGI is slightly higher now than it was at the December bottom, even though gold itself is about the same. It isn't much comfort to someone investing in U.S. dollars, but it may be to someone investing in a foreign currency like the Euro.

The GDP numbers were released at 8:30 AM ET, and the overall number came in a much higher than expected 5.7%. Gold had initially declined as of 8:30, but that decline reversed shortly after the GDP report was disseminated. A brief spurt up to $1,090 ended at about 8:50, which was followed by an equally sharp decline. As of 9 AM, spot gold was at $1,082.30. The U.S. Dollar Index, kick-started from the 79 level, has bettered yesterday's high on the news. The slight predominant buying as measured by the KGI had turned to slight predominant selling.