Gold Recovers After China- And Stock-Market-Related Drop

There was another morning slamdown in the gold price, but not at the usual time. Instead, it was prompted by a U.S. Dollar Index rally that accompanied a disappointing opening for U.S. stocks. That rally melted away with remarkable speed starting at 9:41 AM ET: in fifteen minutes, the Index went from a new high of 80.6692 to a low of 80.3161. A partial recovery prefaced a further downturn, to below 80.25, after which the Index started climbing and retrenching. As of 11:45 AM, it was at 80.35.

Right around the time of the dollar's run, gold lost about ten dollars an ounce before stopping just below $1,077. Subsequently, it was see-sawing in a relatively wide range bounded by $1,076 and $1,087. The top of the range was at the early-morning low that had prevailed before news of the impending People's Bank of China reserve-requirement boost was disseminated.

The Kitco Gold Index indicates the picture is better than it looks. As of 11:46 AM ET, gold was at $1,088.60 for a drop of $4.00 on the day. $4.60 was explained by strength in the U.S. dollar, leaving a gain of 60 cents due to predominant buying. Compared to the January 12th rout, which resulted from the last reserve-ratio hike, the gold market took the news relatively well. Of course, gold's more than $70 lower this time; it's closer to prices that many physical buyers feel are bargains right now. The lower price this time 'round led to a much lesser air pocket.

In fact, there's a real chance that the "air pocket" may be filled with rubber. The afternoon will tell if last night's levels are recovered. The way trading's going, a renewed sell-off looks unlikely.


Update: The gold rally did continue higher as the U.S. Dollar Index continued to fall. As of 12:25 the Index was at the same level it was as of 10:18. Gold, however, was more than four dollars an ounce higher.

That rally, which began at 9:40 AM ET, kept going until 12:20; the metal reached more than $1,091 then. Since that time, gold tailed off to the higher $1,080s as the greenback rebounded. As of 1:32 PM ET, spot gold was at $1,087.40 for a drop of $5.20 on the day. The Kitco Gold Index says that almost all of that drop, all except $0.20, was due to U.S. dollar strength.

As for the U.S. Dollar Index, it rose in a two-step pattern from 80.24 to 80.4 from 12:15 to 1:20; since then, it pulled back a little and then wavered. As of 1:33 PM ET, it was at 80.38.

So, gold has effectively stalled as the U.S dollar flailed around a little. The metal may continue dropping back a little over the rest of the afternoon, but any significant decline would be a curve ball. Nor does there seem to be any reason for it to go up significantly. I'd guess that gold will end up close to the $1,090 level at the end of the day.


Update 2: As it turned out, I was too conservative with that guess. The pullback effectively ended when I posted the last update; the afternoon low was just above $1,086, reached at 1:20 PM ET. Starting at about 2:05, gold began climbing again, reaching the $1090 level at 2:20 and staying above it for the rest of the session, except for a small down-blip between 3:05 and 3:20. The rest of the trading session saw a slight climb, but it was enough for gold to close at $1,092.40 for a drop of only $0.20 on the day. The rest of today's action meant that gold kept almost all its gains from yesterday.

The Kitco Gold Index credited gold with a $3.65 gain on the day due to predominant buying; a $3.85 loss was attributed to U.S. dollar strength. The KGI's close of 877.16 is not that far away from its two-month high of about 887. In the channel it's been in for the last two months, the Index had gotten above 880 before dropping back. The low has come around the 850 area.

Despite the volatility today, the kind that brings cold sweats (and sometimes whipsaws) to thinly-margined FX traders, the U.S. Dollar Index had a fair bit of strength. It traded in a sloppy range from about 1:25 to 2:10; by 2:15, it had broken below the floor of 80.33. The decline lasted until it bottomed at about the 80.3 level, at which it paused until 3:00. Another rally proceeded, which U-turned into a decline that took the Index down to 80.24 as of 5 PM ET. This daily chart of the greenback, from Stockcharts.com, shows that the Index put in a better performance than the trading range I had assumed was coming:



The greenback made an interday high that bettered last Friday's, taking the Index to a level not seen since early July of last year. The candlestick for today's trading looks a lot like that of last Friday, except the body's top is at a slightly lower level and the upper "wick" is longer. The MACD lines in the lower part of the graph are close to crossing, and may next Monday or Tuesday.

A similitude between this Friday's trading and last Friday's was not evident in gold:



Last Friday, gold hit a low not seen since late October. This Friday's candlestick has a similarity of appearance to that of seven days ago, but came close to making a weekly high rather than making for a four-month low. All in all, gold's done very well today given that U.S. dollar's strength and the tightening announcement from the People's Bank of China. The dollar fed off that announcement and its effects on the U.S. stock market. Gold was affected by it, but the negative impact was shaken off by the end of the day - a far cry from the effect the first announcement had. The recovery this week from last week's hammer-down meant that spot gold gained $27.40 on the week, or 2.57%. More than all of last week's decline was erased this week.

That says something, especially the last datum. Thanks to this week's recovery, the MACD lines at the bottom of the graph have crossed into what ostensibly would be a bullish pattern. Since gold's been in a secondary downtrend, this indicator hasn't been all that reliable. More telling is the RSI line, which is still at the level at which it was before the Eurocrisis surfaced.

The Gold/GLD ratio ended the week at 10.21 after it mostly being in the lower end of its day's range. This ratio, which is the price of gold divided by the price of a share of GLD, is graphed here. If below 10, then physical gold is selling at a discount to paper gold.

Next week's trading is going to be significant. If gold keeps rallying, then the latter indicator will put in a stronger showing than last time - even if gold's at a lower price than last time. The MACD indicator whipsawed becasue of the Eurocrisis; it not doing so this time would indicate more normal market behavior, and a better chance for a real run-up. There's been hints that gold is now benefiting from a post-crisis hangover as the cost of the still-sketchy Eurobailout sinks in. In Euro terms, gold did much better this week. This graph of gold divided by the AMEX Euro Index (XEU) shows an upward channel since the late-December low, and a level that's not far from making a new two-month high:




All and all, it's going to be an interesting (if shortened) week...especially since the gold price is moving away from the level at which many physical buyers see it as a bargain. Thanks for reading, and enjoy the long weekend.