Gold Still Holding Its Own

Even though the U.S. Dollar Index hit a daily high of exactly 79 just after 10:20 AM ET, gold was still holding its own at the time. The disappointing job-claims report ended up pushing down the U.S. stock market, and the U.S. dollar has been the prime beneficiary of the downdraft. The gold price didn't initially suffered on account, though: despite the greenback making a new daily high, gold sunk to about where it was as of 6 AM. As of 11:07 AM ET, the Kitco Gold Index has gold up slightly after the strength of the U.S. dollar has been factored out.

That double bottom turned into a triple bottom, which has been broken a little on the downside; as of 11:10 AM, spot gold's at $1,084.20. Yesterday's noon hour was not kind to gold. It remains to be seen if today's will be.


Update: It didn't. Although the downturn got started later today than yesterday, it still kicked in. As of 1 PM ET, gold's has recovered slightly from its low to reach $1,078.00. But, the 12:45 low of $1,072.40 was worse than December's. Interday, gold has reached a level not seen since the beginning of November.

The greenback has had less to do with this drop than recently. It has not bettered its daily high of 79.0; the latest short-term top, made at about 12:37, only got to 78.992.

That's likely why gold mostly recovered from its most recent plummet; as of 1:30 PM ET, spot gold was up to $1,083.30. Last night's surprise drop, just before the State of the Union address, was confounded. This afternoon's looks like it will too.

It looks like the recent downward volatility in gold is the off-shoot of speculative U.S. dollar bull runs.


Update 2: Perhaps. As it turns out, the afternoon drop was confounded: gold kept sailing up above $1,085 before stopping. Then, it drifted in the lower end of the re-established $1,085-$1,090 range before sliding in to a regular-trading close of $1,085.40. The price scraped the $1,085 level for close to forty minutes from 3:55 PM, but didn't fall further. The close left gold down $1.80 on the day. According to the Kitco Gold Index, gold lost $3.35 due to the rising U.S. dollar. The Index credited gold with a $1.55 gain on the day due to predominant buying.

Speaking of the greenback, the U.S. Dollar Index remained in a trading range for most of the afternoon before rallying at 4 PM ET. That rally, though choppy, carried the Index almost all the way up to the day's high before pulling back slightly. The afternoon high of 78.982 was reached at about 5:35 PM ET. It's possible, given the recency of that high, that the dollar is resting before making another advance.


A hunch: This hunch of mine is only a guess, but I believe that gold is being pushed down by a well-financed punter (or group of punters) who are bearish on gold because they're bullish on the U.S. dollar. The adjustment mechanism moving gold down when the greenback's up is not automatic; people in the gold marketplace have to come in and move the price down when the greenback's up (and vice-versa.) From what I've seen, this process doesn't happen very smoothly.

Thus, there's a gap that can be filled by someone who wants to knock the price down when the U.S. dollar has gone up, or is likely to. Had they been right, it would have been part of the market's short-term equilibrating process - just more granular than most.

However, they're not always right (if such a group exists) unless they're very quick on the covering. To borrow Ed Steer's turn of phrase, the punters in question seem like "not-for-profit sellers" because the gold market often turns right back up. They may be fat-tail shorters who take small losses and the occasional large profit. Or, I may be wrong about them being uncomplicated gold bears. (To be strict, I may be wrong about any such group existing at all.)

Some may prefer a dark explanation involving nefariousness, but there's an alternate hypothesis to the one I presented above. It doesn't require villainous behavior, unless you see sneaky trading tactics as villainous:

Someone wanting to commit a lot of capital to the gold market is going to be worried about illiquidity if (s)he's the trader or hedge fund sort. For the trader, being with the long-term fundamentals isn't enough. The entry point has to be timed well.

If I were bullish on an asset class, had lots of capital to deploy, and had a trader's mentality, I would consider setting up a short account using a smaller ration than the long amount I planned to deploy. If the short account is run by an expert short trader with an eye to profit, but doesn't make a profit, then the asset class is unlikely to fall all that much. Going in to it will be far less risky than a big jump in the lake without testing (or even looking at) the bottom first.

Actually, I'm putting you on a little when I used the "I"s above. The above-proffered technique is merely an adaptation of Nathan Rothschilds' legendary trading maneuver when he found out about Waterloo. After reading the good news, he went down to the exchange and sold his stocks. Becasue everyone was watching him, and assumed that he was the man who would find out first (which was true), they further assumed that the news was bad when he sold. A panic ensued, during which Rothschild bought back in. Then, when the good news was announced officially, stocks soared back up and Rothschild made a killing.

The adaptation consists of trading on the opposite side of your call for a time in order to test the call. "If my call is true, then I should lose money over time if I trade on the assumption that it's false." The losses can be seen as a kind of insurance cost, a cost that (of course) only a player with a very large bankroll can assume.

I have to admit that the above chain of hypotheticals is a stretch, but I think a sharp trader would go about a long-term deployment in that way. We may be seeing that process now.