Gold Crushed As U.S. Dollar Soars

The earlier-noted rise in gold ex-dollar has turned into an air pocket. The near-usual morning pounding, from which the gold market has had a respite for the last couple of days, returned with a vengeance. Starting at 9 AM ET, when gold was still above $1,100, a downdraft started; it turned into a rout at the end as technical support level were sliced through. It wasn't until 10:20 AM that stability entered the market - with gold well below $1,070 - which was followed by a further decline. The day's low (so far) has been $1,061.60, a price well below the late-December and end-of-January lows. The previous double bottom at $1,075 has been broken, making for another bullish chart pattern that's been busted by subsequent events. [The first was a reverse head-and-shoulders whose neckline was risen above on Jan. 11th. That neckline was at $1,145.]

The last bullish pattern was busted by tightening moves by the People's Bank of China. This one has been busted by a soaring greenback and double-dip fears. The U.S. Dollar Index, after marking time just below 79.6 between 7:35 and 8:40, rocketed up to well above 79.9 by 10:15. After a brief pullback, the Index made a new high at 79.936 as of about 11:25 AM. 80 is close, and I'm sure it's well-watched.

The rising greenback was likely the trigger, but the Kitco Gold Index has the bulk of the loss attributed to predominant selling; only about 1/7 was attributed to strength in the greenback. As of 11:36 AM ET, the drop from yesterday is $45.60. That daily loss is by far the biggest I've seen since opening up this blog. As of that same time, spot gold was $1,063.70.

Indian buyers, needless to say, now have their bargain.


Update: After this morning's carnage, gold has been marking time. There hasn't been any secondary reaction, just a trading range between $1,060 and $1,067.

What there is, is panic. A report on the morning rout has this quote, the second of two from professional gold-watchers:

From a technical point of view, gold still looks vulnerable, analysts said. "The market looks very heavy here," said Peter Hillyard, head of metal sales at ANZ Banking Group.

"The chart reveals a yawning chasm that could take prices back to $1,010.... it may start slowly but gain momentum as it comes lower," he added. "I think it will fall on the cumulative effect of stops being triggered."

The report itself also mentions that the Euro was driven down by comments from European Central Bank president Jean-Claude Trichet, "predicting many [EU] members will have large, sharply rising fiscal imbalances."

Quiescence has also come for the U.S. dollar; the 80 level has not been breached. If anything, a gentle downtrend has prevailed in the early afternoon, which took the Index down to 79.819 as of 1:20 PM ET. The greenback looks likely to drift.

As of 1:30 PM, the daily loss is at $48.50 and gold is at $1,060.60. That's less than two-and-a-half dollars above its daily low of $1,058.30. Only $5.80 of that loss is attributed to U.S. dollar strength by the Kitco Gold Index.

As mentioned above, the gold market has calmed down now...but the rest of this afternoon is going to be dicey.


Update 2: Another shoe didn't drop since the last update, although it was dicey around 2:20 PM ET. Gold made a new daily low of $1,057.40 at that time, but didn't end up escaping the trading range. The only sustained lowering during the rest of the afternoon was a narrowing of that range, to $1,060-$1,065.

The final drop on the day clicked in at $46.10, on the regular-trading close of $1,063.20. The Kitco Gold Index divided the drop into $8.30 due to strengthening of the U.S. dollar and $37.80 due to predominant selling.

As for the greenback, the U.S. Dollar Index did take a poke at 80 but shied back. After a mid-afternoon decline, it continued to rally until the 80 level was bumped up against just before 5:00. Since then, it's been testing that resistance level - not going much above, but falling only barely below. The day's high in regular trading was just above 80.02.

The term "risk appetite" came up in a Wall Street Journal Online report on the meltdown. This assessment was offered:

With the cost of insuring euro zone debt soaring, the nervousness in the credit markets is sending inventors into cash. That leaves the dollar to benefit as a safe haven at the expense of gold, which traditionally has been viewed as a safe haven but has come to be seen in recent months as a risk play. With the threat of higher inflation low for the moment, gold's support as an inflation hedge is also absent.

Investors have been buying the metal when they are optimistic about markets and economies, and selling it when they are afraid. This trade has been fueled in part by ultra low interest rates that make money for investment more available. Low interest rates also reduce the opportunity costs of owning gold, which pays no interest.

Earlier, it mentioned the rise in jobless claims as the trigger for a removal of risk appetite, from pretty much everything. The U.S. stock market was also routed.

A Retuers report touches on the same theme, bout points to technical deterioration as well:

Scott Meyers, senior analyst at Pioneer Futures, a unit of MF Global, said gold has slid below technical support levels.

"There is not a lot of technical support in gold right now. It is more of a function of how the market reacts to whatever stimulus is forcing the market lower right now," Meyers said....

"If you are short, you stay short, because there is no real reason to be a buyer unless the market sold off more," said Rick Bensignor, chief market strategist at broker-dealer Execution LLC....

Left unsaid was whether gold was scorched by a bear raid or longs were scrambling for the exit, or the first followed by the second. The story itself is headlined, "Gold posts biggest one-day loss since 2008." A companion Reuters report didn't say either, but did contain this item: "April contract dropped $15 within a minute at 10:16 a.m.as prices fell below major technical support at $1,070 to $1,075." It also mentions a Barclay's Capital technical-analysis bear call, based upon gold sliding below their recommended $1,070 stop-loss price.

Myself, I have to admit that today's rout caught me completely by surprise. I can understand the Barclay technical team's bearishness: as mentioned above, two bullish patterns have gone awry [chart from Stockcharts.com]:



There's an old Scottish proverb that says, "fool me one, shame on you [for tricking me]; fool me twice, shame on me [for getting sucked in again.]" It may be relevant in the days ahead as technically-based longs get soured.

The Gold/GLD ratio, as graphed here, didn't go below 10; instead, it reached highs that haven't been seen since late December. Instead of physical gold seelling at a discount to GLD, which is indicated by a ratio of below 10, GLD's paper gold sold off more than physical gold itself. However, unlike in December's bulge, the ratio hit the low end of its candlestock at the end of the day: it closed at 10.19.

In closing, there's a lot of fear out there now. I leave you with the opener to a Mark Hulbert article that, in retrospect, has proven to be portentous:

Gold bulls breathed a huge sigh of relief on Monday, as bullion's $22 rally rekindled hope that gold's two-month-old correction might finally be over.

Yet in that rekindled hope is a problem, from a contrarian point of view. Contrarians would be more confident that gold's rally is sustainable if there weren't such an eagerness on the part of gold timers to declare that it is....

Rest here, all worth mulling over.


Postscript: A commentary by Jon Nadler contains a quote from Matthias Detremmerie that attributes the earlier rally to short-covering and today's rout to stop-hitting:

“What you see is a clear indicator that gold is currently a high risk trade”, said Matthias Detremmerie, founder of Goldessential.com. “The recovery that we saw over the last few days had signs that something was missing. Investors didn’t step in and most of the rise back above $1,100 an ounce had been seen on the back of short positions getting erased and leading to a rally fueled by nothing more than short-covering.”

Mr. Detremmerie added that “today, we saw the inverse as layer after layer of support was pierced. This was a stop-loss frenzy, and once the market moved below last week’s low of $1,074.40 an ounce the floodgates went open. This move – to some extent seen as “capitulation of the bulls”, in combination with a contraction in open interest that has been seen over the last weeks, has some very bearish implications. $1,000 is now certainly back on the radar”, Mr. Detremmerie concluded.

That Hulbert article may well have had its influence on longs, who've been trading with tight stops. There's a certain irony in Nadler ending his commentary with "Cautious Trading," as tight-stop cautious trading seems to have been the tinder that set off the rout.