Gold Drops, Rests, And Climbs Back Partially

The relatively mild drop between 8:15 and 8:30 AM ET proved to be a preface for a more serious drop between 10:00 and 10:15. In between, gold's price declined mildly. Overall, the downtrend took about $20 off. Subsequently, gold bounced up, dove to a new low of $1,061.40, and climbed up somewhat. As of 12:04 PM ET, gold was at $1,068.60. The $9.90 decline on the day was split almost half-way by the Kitco Gold Index: a $5.00 drop due to predominant selling and $4.90 due to greenback strength.

Turning to the U.S. Dollar Index, it did make a double top at the 80.3 level after leaping up from below 80 at about 10 AM. The first part of the double was made around 10:35, and the second between 11:15 and 11:25. Following that double top, the Index did a U-turn and fell back to the 80 level. As of 12:10, it was at exactly 80.

Undoubtedly, the movement of both was influended by Fed Chair Bernanke's testimony about unwinding the liquidity-provisioning programs born of the financial crisis. He didn't mention a rate hike explicitly, but did state that hiking the rate paid on excess reserves would be used to keep inflation bottled up. He also mentioned raising the discount rate to a normal premium over Fed funds and selling some securities to lessen those reserves somewhat. Selling the Fed's MBSs is off the table until the recovery is solid. Reverse repos also can be used as a warning shot, to signal in advance a more determined tightening. The markets took it in stride, all told, but inflation-linked asets dropped.

The day's rout looks over, and gold is likely to be range-bound around $1,065-$1,070 from here. Despite the recent greenback weakness, a return to below 80 isn't likely.


Update: As it turns out, I was too pessimistic about gold. Gold's actually recovered most of its daily loss, and is above the second, deeper stage of the morning decline. The run I thought would peter out kept going until the $1,074 level, reached just after 12:30 PM ET. A pullback kept gold well above the $1,070 level. As of 1:36 PM, the metal's at $1,073.60 for a decline of $4.00 on the day. The Kitco Gold Index attributed all but 70 cents of it to strength in the U.S. dollar.

Despite that overall strength, the decline in the U.S. Dollar Index did resume after it levelled out for a time. After being broached around 12:35 PM, the Index sunk below 80 forty minutes later. As of 1:40 PM, it's marking time slightly above that level.

If the rest of the day is going to be like most, then gold won't do all that much from here. A sustained breakdown from the 80 level by the U.S. Dollar index would keep the early-afternoon gain rolling.


Update 2: As it turned out, gold did drift down somewhat afterwards. The high reached around last update's time proved to be the second part of a double top, which prefaced a slight decline down to the $1,069 level. The metal started rebounding slightly at 3:35 PM ET, reached $1,072, and then sunk a bit before closing regular trading at $1,070.70. $1,075 wasn't reached, but $1,070 was surmounted and held.

That four-dollar drift-up was not prompted by a fall in the greenback. Trading has been quiet for the U.S. Dollar Index in mid-afternoon. As it turned out, 80 was not breached on the downside; it was merely poked at. A drop to 79.975 between 2:25 and 2:30 proved to be a mere spike that was erased in the next five minutes. From 2:00 to 3:35, the Index was range-bound between 80 and 80.05. As gold drifted up, the greenback didn't follow. Instead, the Index drifted up at that same 3:35 PM, which put a little pressure on the metal to come down a bit. The upswing ended at 80.09 as of 4:15, and the Index drifted down to its previous range.

For the day, gold lost $6.90. The Kitco Gold Index allocated the loss to $3.70 due to strengthening of the U.S. dollar and $3.20 due to predominant selling.

This Reuters report pegs the loss as largely due to Ben Bernanke's comments during his Congressional testimony:

"Gold is down on the Bernanke comment because it boosts the dollar by talking about removing government stimulus as well as easy monetary policy," said Tom Hartmann, analyst at California-based Altavest.

Bernanke detailed how the Fed would likely begin tightening monetary policy by removing cash from the financial system before it turns to raise benchmark short-term interest rates, even as he stressed it was not yet time to do so.

Hartmann said that investors would likely sell into possible near-term rallies in gold because the Fed's monetary exit removed the possibility of inflation as it started pulling back economic stimulus.

Gold actually wasn't pushed down all that much, given its gains yesterday, even though that's largely because bargain-hunting has been keeping it up. A trader quoted later in the story said that gold traders were keeping close tabs on the greenback and adjusting trades accordingly.

A Wall Street Journal report mentions the same factor, along with continuing worries about the Grecian fisc, but has this pithy quote near its end: '"Most of the [U.S dollar] trade right now is a confidence play," said Daniel Pavilonis, a senior market strategist with Lind-Waldock.'

As a side note, things have gone quiet in China as far as the gold market is concerned. There have been no items of influence for some time now.


These Stockcharts.com daily charts of both gold and the U.S. Dollar Index show holding patterns in both.



The gold chart shows the metal struggling along just above its newer bottom level. The old interday low of $1,075 has become close to a short-term interday high. It hasn't been that hard recently for gold to get above $1,075, but it has been difficult for the metal to stay above that level.

As noted above, the main reason is the continuing strength of the U.S. dollar:



The chart of the Index shows a day's pattern that's a little unusual during this two-month run. The Index was up on the day, but it high was barely above the low set last Friday. The greenback may stay stuck at this level over the next few days.

The Gold:GLD ratio, calculated by dividing the price of gold by the price of one share of the SPDR Gold Trust, closed at 10.2 today - effectively at its average. (Because GLD is made up of paper gold, each share representing 1/10 of an ounce, it typically sells at a slight discount to gold itself. A discount is shown by a ratio value of greater than 10.) Since the last time it went below 10, gold has climbed up a bit but not by that much. A six-month graph of it is here.

This day's trading did contain yet another downdraft this morning, but it was reversed partially in the afternoon. Recently, a reversal of this sort has been normal; for whatever reason, it doesn't seem that susceptible to arbitrage. Perhaps there's too much of an "ouch" factor in those days when gold plummets in the afternoon for such arbitrage to be worth anyone's while. Perhaps the trend is too recent to be counted upon. Perhaps the overall yield relative to risk commitment isn't worth the trouble.

As the U.S dollar get higher and higher, more and more gold traders seem to be focusing on it - with some good reason, as the fate of gold is closely tied to the fate of the greenback. I just note in closing, and in passing, that such crystallizations are usually snapped by outside events intruding. I can't think offhand of what would cause gold to decouple from the greenback, but such an event may be coming. Just a closing thought.