Wednesday, January 20, 2010

Rising Greenback Pushes Gold Down

After making a run at $1,140 last evening, shooting slightly above that level by 8 PM ET, gold fell to about $1,134. News came out from the PRC that the People's Bank of China has told several major banks to stop lending because they've overextended themselves. The markets interpreted this move as further tightening, vaulting the U.S. Dollar Index to almost 78. As night turned into morning, gold dripped further even as the greenback held steady. The drop that started about midnight ET took gold below $1,128. A recovery rally was followed by a second dip which bottomed at $1,128 except for a brief downards spike that took gold to $1,126.30. At about the same time of the second dip, the U.S. Dollar Index rallied to reach 78.213 before pulling back somewhat.

This Bloomberg report attributes the gold drop to the rise in the greenback, as well as waning investor demand due to the new platinum and palladium ETFs:
“Gold continues to trade off the greenback,” Andrey Kryuchenkov, an analyst at VTB Capital in London, said in an e-mail. Bullion has been “gradually decoupling” from other precious metals, with its performance against platinum group metals reflecting “weakening investor interest” in gold at the moment, he added.
The same report also notes that the SPDR Gold Trust ETF's holdings dropped slightly yesterday. A Wall Street Journal Online report quotes an analyst who also notes that it's the U.S. dollar holding the metal's price down:
"It's difficult for gold to push out of its range in dollar terms while the momentum is for a stronger dollar," said Mitsubishi analyst Tom Kendall.

Gold has been trading between $1,120 an ounce and $1,160/oz since the start of the year and may do so for "some days to come," Mr. Kendall said.

As of 8:15 AM ET, gold's decline intensified as the second rest period came to an end. The metal bottomed at $1,122.60 shortly before 8:30 AM ET. No news seems to have accounted for the drop, but before it started gold was up once the U.S. dollar rise was factored out. According to the Kitco Gold Index, gold was down on that basis as of 8:30 AM ET. As of the time of this post, spot gold's at $1,122.90. The December U.S. wholesale price numbers had a late and mild influence on the drop, as the 0.2% rise combined with the December CPI number "supported the view that inflation is not a problem."

The gold-at-a-discount indicator, calculated by dividing the price of gold by the price of a share of GLD, closed at 10.21 yesterday. During interday periods, it has not sunk below the trigger point of 10 since the beginning of this year. When gold sells at a discount to the equivalent in GLD shares (10), it's oversold and tends to rise.

According to this daily chart of gold, the metal has veered towards an equilibrium that's right around its 50-day moving average:

Chart-watching jargon aside, a move towards equilibrium is what the chart shows. In the regular world, equilibria don't last for all that long. Although the low end of the present trading range has held up, gold looks as if it's going to jolt out of equilibrium on the downside. That's consistent with the resurgence of the U.S. dollar, not to mention the credit tightening in the PRC.

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