After Another Downward Test, Gold Rallies Then Fluctuates

Perhaps the decline early last morning was technical. A two-stage push-down of gold got the metal below $1,090 as of 9:10, and at a daily low of $1,087.70 right after 9:30 AM ET. However, unlike the one more than twenty-four hours ago, those two didn't last. When it became apparent that the drops provided no catalyst to a new decline, the gold price took off.

If those two drops were part of a short seller's maneuver, then someone's fingers got burned.

The indecisiveness exhibited at the start of regular trading was broken by a rise that took gold up to just below $1,096. That gain tunred out to be a blip, heralding the first drop. After it, the gold price recovered to where it was at the start of regular trading: the $1,092 level. Following the second drop, the metal rallied almost ten dollars an ounce, reaching the $1,098 level by 10:00. The price then fluctuated in a rather wide range, slowly sloping downwards, as the price went down to $1,094, back up to just above $1,097, and then to $1,093 as of about 10:45. Then, the gold price took off again: by 11:15, it had made a new daily high at $1,103.90. $1,100 failed to hold, though, and gold took another dive down to about where it opened. As of 11:51 AM, spot gold was at $1,096.00 for a loss of $1.20. The Kitco Gold Index allocated the loss to -$4.30 due to U.S. dollar strengthening and +$3.10 due to predominant buying.

After plateauing at just above the 81.1 level, at which a multiple top was made, the U.S. Dollar Index slid down in a two-stage drop that ended at just above 80.9 as of 9:54. After veering in on a trading range, the Index took anothe dip that was ended by a brief rally between 10:29 and 10:42; it topped at just above 80.98. A further decline followed, bottoming at a little below 80.81 as of 10:51. Then, the decline reversed as the Index ascended to 81.087. Although failing to make a new morning high on that run, the rally was fairly solid. It was in the middle, when the rally accelerated, that gold got knocked down to the sub-$1,094 level. As the Index pulled back, gold pulled up.

However, the Index's pullback was the prelude to a further rally; 81.1 was bested at 11:49. As of 11:53, it was slightly lower at 81.0841.

So far, it has been a choppy day; again, $1,100 was broken through but only temporarily. Gold, however, has shown a bit of strength. The afternoon will reveal if the strength holds.


Update: So far, the strength has not only held but also's increased. After that downturn which ended just before the time of the original post, gold not only got above $1,100 but also surmounted $1,105. It can be said that gold is back.

Only some of the gain has come ex-greenback. The U.S. Dollar Index has been on a weakening trend ever since making a double to at 81.115 as of about noon. The first part of the double top was made around 9:30. The Index spent the next hour descending to the 80.815 level before stablizing out at about 80.85 before dropping again. As of 1:51 PM ET, it was at 80.69.

Gold went on a $14/oz ride, in three stages, after bottoming below the $1,094 level just after 11:30 AM. The day's high of $1,110.50 was made just before 1 PM. A slump just after the top shaved less than five dollars an ounce off the price; it ended at 1:20 PM. Since then, gold was been bobbing at about the $1,107 level before moving up again. As of 2:02 PM ET, the spot price was $1,108.70 for a gain of $10.80 on the day. The Kitco Gold Index has gold gaining $1.10 due to slight weakening of the U.S. dollar; $10.30 worth of rise is attributed to predominant buying. The latter category has been positive all the way through the day, but it grew considerably since the last update.

Evidently, a technical sell has led to a technical rebound. The remainder of the day will show if it sticks.


Update 2: Not much else happened, which was significant in and of itself. Gold kept its gains; $1,100 held.

The metal spent some time bumping against the $1,108 level, but fell back in a somewhat leisurely decline between 2:00 PM ET and 2:40. That fall took the price down to $1,104, where it lingered around until 3:30. The next fifteen minutes saw a rise that reached $1,108, but any attempt to surpass that level was frustrated. Instead, the metal pulled back to just below the $1,106 level before blipping up for a final time just after 5:00. After a partial pullback from that blip, spot gold closed at $1,106.60 for a gain of $9.40 on the day. The Kitco Gold Index divided the gain into $0.70 for a weakening U.S. dollar and $8.70 for predominant buying.

In the interim, the U.S. Dollar Index didn't do all that well. After marking time for a half-hour, the Index took a spill from 1:40 to 2:05, moving from the 80.9 level to the 80.7 level. Then followed a relief rally for the next hour, which crested around 80.80. The next hour saw it descend back down to where it was at 2:00, stopping slightly above the 80.65 level at 3:55. The Index subequently crawled up to enter a rather narrow trading range centered around 80.73.

The six-month chart, from Stockcharts.com, shows again that 81 was penetrated but not sustainably risen above:



Despite the 81 level being temporarily bested, despite the interday high being the second-best in the last nine months, the Index still closed down on the day for the second day in a row. Although there hasn't been a bearish phase like there was after the first run, a phase that manifested itself between December 22nd and January 14th, the continuation of the rise has been labored. Of note is the fact that the MACD lines on the bottom have crossed on the negative side, albeit barely.

It would be dangerous to conclude that the Index is due for a serious pullback, despite the popularity of the long-dollar side amongst non-commerical players in the dollar-Euro contract. Precedents from the Index's '08-early '09 run suggest a spurt-up is likely, even if any such spurt-ups have been batted down as of now. One bearish note is an RSI divergence noticable at the top of the chart: the Index peaked higher last Friday than it did on the 8th, but the RSI index at the top peaked at well above oversold levels on the 8th. This time, it peaked as a noticeably lower level. Also, the peak of the Index was before the peak of the RSI line this time 'round. Going by this indicator alone would yield the hunch that the Index is in for a pullback; the labored nature of the last phase of the rise hints at a rolling top.

The trouble is, there's no likely fundamental reason for why a real decline should ensue right now. Euroland is still besotten by the Grecian debt crisis, and it would take quite the Eurobooster to predict a sustained rise in the Euro going forward. The economic recovery is still spotty in the States, and the Fed-driven event that everyone's waiting for will be bullish for the greenback; it almost certainly won't be bearish. A pullback is possible for market-internal reasons, but I don't see it going that far.

Turning back to gold, the daily chart (also from Stockcharts.com) shows a decline that had gotten rolling but has stopped:



The overall MACD-lines pattern doesn't show that great a performance over the last two-and-a-half months, as the peaks in that timeframe have been around the zero line. Back when gold was roaring, as indicated on the left part of the graph, the peaks were well into positive territory. However, in the nearer term, a positive divergence can be pointed to: the last time gold was at the $1,125 level, both MACD lines were at lower absolute values than they were at as of last week's peak. I know I'm sticking my neck out somewhat, but I suggest the level to watch for is $1,125-30. The People's Bank of China is scheduled to make any announcement in a couple of weeks, and they announcing another 0.5% hike in the reserve ratio is unlikely to faze the gold market all that much. It is possible that a larger hike will be announced, which would likely put a serious dent in the market. I don't know of any scheduled market-threatening news in the near future other than that event window.

Granted that my hunch is informed by technical factors, not by fundamental factors, but I think an upside move is more likely in the coming days than a downside move. I may be overly encouraged by today's recovery to above the $1,100 level, but it was encouraging. The next days will show if it's sustainable or an interruption.