Consumer-Confidence Drop Pushes Down Gold

The release of the consumer-confidence number as of 10 AM ET could be seen as another test of the gold market's resilience. The January number was much lower than was December's, and well below the expectations for only a slight drop.

Gold was shoved down by the release of the data, but - significantly - not as much as it was by the IMF-sale announcement and the Fed discount-rate hike. Shortly before 10:00, gold was at about $1,110. The data-induced drop, which ended just after 10:35, took the price down to $1,099.40 - almost exactly $1,100.

When regular trading opened, gold was well above $1,113. The day began with a drop, which ended before 9:10 at $1,106.00. Subsequently, and before the data release, gold recovered partially and stayed stuck in a range between $1,108 and $1,110.

Gold moved up, albeit choppily, after bottoming at the $1,100 level. As of 11:49 AM ET, the metal was at $1,104.80 for a drop of $7.80 on the day. The bulk of that drop, $4.85, was attributed to predominant selling by the Kitco Gold Index.

The dog that didn't bark after the data release was the U.S. Dollar Index. A mild rally had already begun once regular trading began, which carried the Index from 80.6 to 80.79 as of about 9:40. That run represented the bulk of the gains so far. The dollar hardly moved when the data was released. A pullback did turn into a rally from 10:15 to 10:35, but it topped out at a level barely above 9:40's. Since then, the Index has been in a narrowing range centered around the 80.7 level. There was no serious move into the dollar as a result of the consumner-confidence number.

Consequently, the downdraft in gold wasn't that bad. The rest of the day will show whether the gold market can recover from this spill, as has been the case recently, but it can be said that the $1,100 floor is quite solid right now.


Update: Subsequent to that relief rally, gold made another try at $1,100 and briefly got a little below it. The peak, at almost $1,107, came before the time of the original post. The drop began in earnest as of noon ET, and ended after 12:40 PM with gold reaching $1,098.50. From then until 1:51, the metal's price recovered a little and wound its way into the $1,102 level. A slow recovery inched along since then. As of 2:04 PM ET, spot gold was at $1,103.80 for a loss of $9.20. The Kitco Gold Index put $4.20 of the drop into the strengthening-dollar category and $5.00 into the predominant-selling slot.

After trading in a range, the U.S. Dollar Index picked up right after noon in counterpoint with the gold drop. A quick jump followed by a more restrained rise pulled the Index up to almost 81 before it tailed off and settled into a range between 80.83 and 80.89. As of 2:07 PM, the Index was at 80.854. The greenback's rise could be explained as a delayed reaction to the consumer-confidence data, but a more likely explanation is the reaction to the disappointing day for the stock market and encouraging day for Treasury securities.

This time, gold hasn't recovered from the bad-news-induced drop-down. $1,100 has been holding, but only just. Given recent market conditions, the old short seller's game of whack-a-stop has probably been deemed too risky by people who have access to enough capital to swing it. I don't think that a large drop from the current price is likely. It is, however, a possibility.


Update 2: A possibility that never happened. That, and no further fundamentally bearish reason intruding, kept the $1,100 floor intact.

As of the the last update, gold was around the $1,104 level. Despite a slight dip followed by a rise, that level is where the price centered at until just after 3:40 PM. The fifteen-minute drop just afterwards took gold down only three dollars an ounce, making that drop the most sedate of the day. After bottoming at about 3:55 PM ET, the metal rose a little before drifting towards the close of regular trading at a little under $1,104. As of the close, spot gold was at $1,103.50 for a drop of $9.10 on the day. The Kitco Gold Index divided the loss into $5.00 due to strengthening of the U.S. dollar and $4.10 due to predominant selling.

The U.S. Dollar Index didn't do much for the rest of the afternoon, barring a rally that stuck longer than an aborted one which took place between 2:20 and 2:55 PM. After giving up all the gains made in that time, the Index rallied from 80.81 to 80.985 in the second stab of the day at the 91 level. That gain wasn't built on, making for a double top in the interday chart, and it ended just before 4 PM ET. Subsequently, the Index drifted down. As of 5:30 PM ET, it was at 90.91. 91 is still close, but still out of reach.

The daily chart, from Stockcharts.com, shows the bull trend is still rolling:



Yesterday's indecisive trading ended up being a near-term floor in retrospect. Desite the RSI line at the top being in an elevated near-oversold level, the near-zero neutral reading of the MACD lines at the bottom did foreshadow a continuation of the uptrend. Although both lines are at an extremely high level for the last six months, they were higher in August, September and October of 2008.

Still, the greenback has encountered resistance at the 81 level after bursting through it last Friday. The top of the pre-burst trading range, though, is beginning to look like a floor. The Index's rally has slowed, undoubtedly, but its lack of pullback indicates some strength is left. Despite non-commercial longs reaching a new record high in the greenback/Euro contract, those longs are still on the good side of the trade. The greenback sheep aren't being sheared, as yet anyways.

Befor discussing gold itself, I'd like to digress for a moment with a six-month chart of the Kitco Gold Index (KGX):



The KGI, drawn using the blue line, looks pretty good. The channel it was in from mid-December to early this month has been solidly broken on the upside, and its most recent top coincided with a new record high for gold in Euro terms. Recently, however, the KGI has pulled back a little; the record high set in early December was not breached. The chart hints at an exchange of one channel for another, higher one.

Thanks to the strength in the greenback, the chart for gold itself looks less delightful:



As noted beforehand, the $1,100 floor did hold; that means gold is still in a trading range bordered by $1,100 and $1,125-30. Today's action put it at the lower end of the range. The RSI line is now just above 50, the level at which gold's early-February rally topped out. This one has seen a higher RSI level, but not by much. The greenback is still supplying those headwinds, and the recent spooking over the Fed discount-rate hike suggests that a real Fed Funds hike has not been discounted as yet.

Although gold did not recover from this morning's consumer-confidence-induced drop, unlike its recoveries from the last three bad news days, it has still held up so far. The most likely reason for the lack of recovery, other than the greenback's performance, is the consumer-confidence drop can't be interpreted as a non-event. The discount-rate hike and IMF open-market sales announcement were.

The afternoon Reuters report ascribes today's fall to a drop in risk appetite. Also cited is price pressure due to COMEX March options expiration. This quote suggests an expert is considering the possibility of a drop below the $1,100 floor: "Support seen in $1,098-1,094 area -- downward trend line connecting the record high, January and February peaks, as well as 20-day moving average - Rick Bensignor at Execution LLC." Granted that the $1,096 area isn't that far below $1,100, but it's still below.

Speaking of risk appetite, a recent speech given by Alan Greenspan might bring heart to Fleckenstein junkies and others who are cynical about Greenspan's track record. He said that the recovery is extremely unbalanced, and there are good reasons to fear it's not sustainable: 'With both housing starts and auto sales "dead in the water," he said he thought it would be difficult to make the case that the economy is poised for a strong rebound.' Those who see his calls as a contrary indicator would have to concede that the recovery may surprise us all on the upside.

Over the longer term, gold's holding up well despite the strength in the U.S. dollar. The Kitco Gold Index does show it. If the greenback rally reverses for some reason, this year would be a good one for gold. The underlying resiliency continues.