Gold Breaks Down Through $1,100

I have to admit to being surprised on the timing of the drop, which carried the metal's price down to $1,090 before the decline stopped. What was even more surprising, at least to me, was the fact that the U.S. dollar weakened too although slightly.

The metal drifted up somewhat last evening (ET), from the start of the night shift to just after 9 PM. After the top of about $1,108 was reached, the price spent the rest of the night drifting down until the $1,105 level was reached right around midnight. Then, the downdrift reversed itself before gold settled into a range centered around $1,106. That range ended around 2:30 AM ET with a drop to $1,100. A recovery ensued, which almost got gold back to $1,105 again, but that rally ended with about a $14 plummet taking place between 3:45 and 4.30 AM. When it was done, the metal's price was slightly below $1,090.

There wasn't any substantial recovery this time 'round, only a relief rally that established a newer trading range between $1,090 and $1,095. The metal spent the next 3 3/4 hours in that range, although bumping at the top of it recently: as of 8:07 ET, spot gold was at $1,095.30 for a drop of $8.20 from the close of yesterday's regular trading. The Kitco Gold Index attributed more than all of the decline to predominant selling pressure: -$10.40. Had that category been zero, gold would have gained $2.20 due to a weakening U.S. dollar.

After an abortive rally in the early evening, the U.S. Dollar Index did weaken. Between 7:30 and 9:15 the Index slid to 80.95 to below 80.75: that double-top I mentioned last night did presage a slump. The Index spent the next two hours in a tight range centered around 80.75. Then, it attempted a rally that proved to be only a molehill on the interday chart. Left at slightly below 80.75 as of 1:30 AM, the Index mounted a more substantial rally that nevertheless topped out at a lower level than did the one ending betwen 7:30 and 7:35. That rally lost almost all its gains between 2:55 and 3:40 AM, but that drop reversed in the subsequent half-hour. The next top, as of about 4:10 AM, was lower still: 80.95. The drop after that lower peak was more extensive, too: as of about 5:50 AM ET, the Index has been pushed down to 80.605. It then entered a choppy but narrowing range centered at the 80.73 level. As of 8:23 AM ET, the Index was at 80.765.

I admit that I see, by habit, a dance of two when it comes to movements in the gold price. My "muse," to put it one way, is the movement of gold in counterpoint to the U.S. Dollar Index. Early this morning was one of those days when my "tune" was off. It will be of interest for some readers to know that the $14/oz decline took place shortly after the opening of London trading. Those not inclined to blame the lads of London should recall that gold's done fairly well vis-à-vis the greenback as of late, which does create air pockets along the way.

This Reuters report uses bland language to describe the drop. "Technical selling" is paired with the now-familiar term "risk appetite" to explain it, as is shown in this quote from an expert:

Ole Hansen, senior manager at Saxo Bank, said the precious metal was reacting to a retreat in risk appetite, and to unfavorable technical factors.

"We are back below $1,100 an ounce. That's a technical level we managed to bounce from a couple of times last week, we are now through and we have to find support once again," he said. "The (next) level is around the $1,073 area."

The title of the report cites nervousness ahead of Bernanke's testimony, a sensible claim given the jitters the discount-rate hike threw into the market. The second expert quoted hints that the drop was due to gun-jumping with respect to the greenback:

"If, as we suspect, he maintains the clear stance to a loose monetary policy, the market will buy dollars on the hoped-for support this will give the economy," Credit Agricole CIB said in a note.

"If he signals that the exit strategy is picking up pace, either the prospect of higher yields will bolster the dollar, or a nervous market, post the consumer confidence figure, will worry about activity and swing toward the dollar.

"Hence, without a clear mood change it looks like heads I win and tails you lose as far as the dollar is concerned."

The U.S. dollar market itself doesn't seem to have picked up on this happy circumstance as yet. To the extent that this anticipation is the driver of the gold decline, which it may not be, a failure of the greenback to rally as expected may drive gold back up.

The morning report from the Wall Street Journal Online attributes the drop to a delayed reaction to yesterday's consumer-confidence disappointment and a to general drop in commodities. Quoted therein is an anonymous trader who admits to playing whack-a-stop:

"We just hit [sell] stops, mostly at $1,100," said a trader at Swiss trading house MKS Finance in Geneva. Gold should find some support around $1,090 an ounce, followed by next support at $1,070 an ounce, the trader said.

[Come to think of it, the old saw "the gnomes of Zurich" might be due for a retool.]

The overall tone in the article, when the commodity complex isn't mentioned, suggests that gold ex-greenback got ahead of itself and was due for a pullback.

As 9 AM rolled in, and with the start of regular trading, gold has declined but only a little. The above-mentioned trading range is still holding. As of 8:56 AM, spot gold was at $1,094.30 for a drop of $9.20. The Kitco Gold Index attributed $10.70 worth of drop to predominant selling. As far as the greenback is concerned, the U.S. dollar index firmed up but has not taken off. As of 8:58, it was at 80.765.