Dormancy Period Ends; Gold Rockets Up

About this time last Friday, I was wondering if gold was going to stay below $1,080. Today, thanks to an ISM report showing a much stronger rebound in manufacturing than expected, gold has leapt upwards. $1,085 not only held but was bettered. Shortly after that report was released (at 10 AM), gold shot up from just over $1,085 to reach $1,098. Subsequent to that shoot-up, the price declined a little as the market settled down. A narrow range developed, centered around $1,095, until gold fell further. According to the Kitco Gold Index, almost all of gold's $12.20 gain as of 11:02 was due to predominat buying.

Therein lies a near-term paradox. The U.S. Dollar Index also strengthened since the report's release, bobbing up to 79.40 as of 11:05 AM ET. The only way to explain both is gold being oversold until this morning. There's a thin hope that the gold market's now seeing recovery as bullish due to future inflation, rather than bearish due to a consequent Fed Funds rate hike, but that hypothesis is a bit of a stretch right now.

The recent strength in the greenback contributed to the decline from nearly $1,100, as did a cooling-off period. The rest of the day will show if gold holds or pulls back a little more. I dare not forecast that gold will keep rising.


Update: I should have dared. After that respite, which featured a busted drop-back, gold began taking off again. Shortly after noon ET, preceded by inaction at the $1,095 level, the price soared up to $1,105.70 before pulling back a little. Even after that pullback, gold stayed above $1,100. As of 1:25 PM, gold gained $22.80. The Kitco Gold Index has all but $2.75 of that gain attributable to predominant buying.

Yes, the greenback has had little to do with the shoot-up. The U.S. Dollar Index fell since the original post, but the drop was not been as swift as the earlier one around 8 AM ET. Nor had the Index worsened its daily low of 79.190. The level at which it was at as of 1:28 PM, 79.25, represents less than 50% retracement of yesterday's gain. Gold has taken off despite the greenback enjoying a mere pullback.

It's been quite an upside surprise, only telegraphed by the negative sentiment which (I'm sure) is dissipating. Perhaps some short covering is accentuating the rise, originally triggered by the deficit news and amplified by the ISM report. Short-covering rallies tend to be intense but not long-lasting or very extended, unless the short-covering accompanies a change in trend. It's too early to say right now.

However extended this rally is, it's still going. Spot gold's still in a post-surge holding pattern; as of 1:37 PM, it's $1,103.30.


Update 2: The metal managed to get above $1,105, but the rally continued only in fits and starts after the last update. The U.S. Dollar Index continued to slide down, and did end up making a new daily low at 79.173 just after 5 PM ET. Despite that new low, the greenback was basically marking time as of 5:40 PM ET. Its value as of then was 79.2, for a greater than 50% retracement of Friday's gain.

Gold, after a slight rise that started just before 2:30, ended up settling into a range of its own that was centered just above $1,105. The end of regular trading saw the metal come to rest at $1,105.60. $21.40 of the $25.40 gain on the day was attributed to predominant buying by the Kitco Gold Index; only $4.10 was attributed to the U.S. dollar dropping.

The headline of this Globe and Mail report tells of the magnitude of today's rise: "Gold posts biggest gain in 3 months." The first quoted expert referred to that future-inflation hypothesis I mentioned, but treated skeptically, in the pre-update part of the post above:

“The [Institute for Supply Management] manufacturing number was good. There is the suggestion of inflationary pressures coming through,” said Robin Bhar, analyst at Calyon.

Also credited was the rise in oil, and a more general rise in "risk appetite." Another quoted analyst in that story seemed skeptical of the rally itself. (At times like this, it seems that everyone's a skeptic in one way or another.)


Not mentioned was the ramp-up in the U.S. deficit projection for 2010, which was disseminated at about the start time of today's rally. That $1.56 trilion number may well have put an inflationary cast on what otherwise would have been a "so good, it'll push up the rate hike" manufacturing report. Higher deficits increase the risk of some of them being monetized by the Fed, leading to higher inflation down the road. There's already speculation floating around that the soon-to-end quantitiative easing program will have a sequel, likely under a different name.

Another possibility is buying due to the Grecian budget crisis, even though the U.S. dollar has been the beneficiary. I mention this possibility because the Bank of America put out a report recommending European investors buy out-of-the-money calls on gold denominated in Euros, on the basis that the premiums were unusually cheap. The bull case for gold itself was: the recent discrediting of the Euro will encourage emerging-market central banks to lower their Euro holdings and buy gold as well as U.S. dollars.

Whatever the collection of reasons, I'm reiterating my own hunch about short-covering. Of course, covers have a cause; the above reasons yield a list of several. The question now is, will it continue? Recently, gold has been tested on the downside in late-night trading. I didn't know if a further test will happen tonight, as they tie in with rises in the greenback. There hasn't been one since the afternoon started. Also, the $25.40 rise is a game-changer which might well make the plungers skittish.

We'll see tomorrow. What I know about today was that the rise was far larger than anyone, including myself, anticipated...and I was half-expecting a bullish reversal early this morning.