Gold Held Down By U.S. Dollar, But...

Given the slump early this morning and the softness before the ADP jobs report, the rise in the U.S. Dollar Index that started right before 10 AM ET has been a surprise. Even more of a surprise, perhaps, is the fact that gold hasn't been pushed down all that much as a result.

That jobs report pushed gold down initially. From the $1,117 level as of 8 AM ET, gold fell more than six dollars an ounce in a half-hour. A short pause was replaced by a rally up to $1,116, but the dollar rally clipped it short and drove the price down to a daily low of $1,108.50. Once the greenback rally stopped, though, gold climbed back up to reach $1,115 before pulling back again.

The sedateness in gold makes for an eye-opening contrast to the spurt-up in the U.S. dollar. After an initial boost above 79.1, the U.S. Dollar Index pulled back a little until the above-mention 10 AM threshold. Then, it went on a tear that took it well above 79.3. After a slight pullback, the Index made a day's high of 79.372 as of 10:42. Since then, the dollar slid down in waves that took it down to just below 79.25 as of 11:18. Subsequently, it rallied somewhat to almost reach 79.3: as of 11:28, it was at 79.2881.

Despite the $1.70 drop recorded at 11:30 AM ET, Kitco's Gold Index still had a gain of $2.70 once the greenback was factored out. As of that same time, gold was at $1,112.00. The two-day uptrend has been halted for now; afternoon trading will show if U.S. dollar strength heralds a more determined pullback. It's happened before...


Update: Gold hasn't been slammed down, but it did fall at a fairly steady rate from 11:20 AM ET to 12:45 PM. As of 1:20, Kitco's Gold Index had gold down due to the rising U.S. dollar almost exclusively; the gain from predominat buying has been whittled down to ninety-five cents.

The U.S. Dollar Index got to 79.4056 on the final push-up of what proved to be a strong late-morning rally; it ended at 11:42 AM. Since then, it's churned in a fairly wide range between 79.3 and 79.4. It's now recaptured most of its Friday gain, as aftershocks from the Greek crisis hit the marketplace. The fear's now of a spread to other fiscally weak Euronations (and Dubai.)

Early afternoon action has shown that gold still falls in the absence of a slam-down. Skittishness on the short side, not to mention fear of whipsawing on the long side, could explain why there's been no heavy weight thrown around in the noon hour. As of the time of this post, spot gold's at $1,109.90. Even after the slide, $1,110 ended up holding (so far.)




Update 2: As it turned out, $1,110 did hold as a support level but it made little difference. The rest of the afternoon saw gold marking time in a narrow trading range with $1,106 as the bottom and $1,110 as the top. It closed regular trading at $1,109.30, with a $4.10 loss on the day. The Kitco Gold Index (KGI) credited gold with a $1.70 gain due to predominant buying after strengthening of the U.S. dollar was taken into account.


This 60-day chart of the KGI reveals quite a different underlying story than the raw price chart shows. It starts just after the December correction got rolling:



It certainly shows that the bulk of the correction is due to the U.S. dollar's advance. Note that the spread widens when gold is low, where the greenback's influence is most felt, and that the second part of the double bottom shown by the raw gold price (in red) is matched by a higher bottom in the KGI (blue.) It may not be much comfort for traders, as gold is traded in U.S. dollars, but it might be to any investors or accumulators. Of course, if the U.S. dollar keeps ramping up, the KGI may not even serve well as reassurance of a slow rise in overall gold demand.

As far as the greenback is concerned, the U.S. Dollar Index broke out of that range established early this afternoon - on the upside. After shooting up above 79.43, the Index pulled back before regrouping and climbing back up above the 79.4 level. The day's high of 79.455 was reached at about 4:50 PM ET. Since then, the Index has been moving in another range bottomed by 79.4. The greenback ended up close to its Friday high after giving up more than all of that gain as of early this morning. It was certainly a wild ride for the Index today, but one that was solidly upwards since 4 AM: from below 78.7 to above 79.45, in a little less than 13 hours. The present range might well be broken on the downside simply due to rally exhaustion.

The gold:GLD ratio closed at 10.21, the same level as its 50-day moving average, but it showed an added premium for gold most of the day. (This ratio is calculated by dividing the price of gold by the price of one GLD share. When it's below 10, physical gold is selling at a discount to GLD's paper gold.) Its lowest value this trading day was 10.19, and it got as high as 10.35. A chart of it, courtesy of Stockcharts.com, is here. My own eyes tell me that the behavior of the indicator, and of gold itself, is a lot like early September's jump-up except somewhat weaker. Time will tell if my opinion is borne out.

A Reuters report attributes the softness in gold to the dollar plus technical factors. These four points in the Reuters list are of note:

* Gold turned lower as the dollar rose against euro and the EU backed a Greek deficit-cutting plan.

* Much stronger euro -- the $1.41 or $1.42 levels -- would be more compelling to support gold rally - Bruce Dunn at Auramet.

* Market seen overbought as April futures hover above 14-day moving average at $1,108 - traders.

* Charts show gold rallies usually taper after two sessions, and that explains Wednesday's weakness - CitiFX.

Also therein is a bearish recommendation from Barclay's Wealth Management USA.

The Wall Street Journal Online report starts off by not mentioning the usual suspect. Instead: "Gold futures slipped slightly Wednesday on market caution ahead of Friday's release of U.S. jobs data, as well as chart-based resistance." The stronger greenback was mentioned just afterwards; its rise was attributed to both the ADP jobs report and a strike call from Greece's largest union which brought default fear back in the market. Regarding technical reasons:

The market is "a little tired" after bumping up against the $1,126 area, said George Gero, vice president with RBC Capital Markets Global Futures.

Resistance for the April contract came from a trendline running through the December high of $1,229 and the January high of $1,166.70, said Derrick Lewis, vice president and senior trader with Cleartrade Commodities.

"Until gold can close solidly above this trendline and both the 18-day ($1,114.70) and 50-day ($1,129.90) moving averages, traders are more apt to sell rallies," he said.

The next important economic event being watched for is Friday's unemployment report. Overall, the picture is of a rally that was stopped because the U.S. dollar won't co-operate by falling. I leave you with a Stockcharts.com daily chart of the greenback, which shows a four-day holding pattern near overbought levels. Of note is the MACD lines on the bottom, which still show a bullish trend: