Gold Holding Steady

After rising up to the $1,080 level at about 7:45 AM ET, gold pulled back as regular trading opened. Since then, until the U.S. Dollar Index plopped down, it moved without much conviction between the $1,070 and $1,075 level. As the Eurocrisis recedes, the metal's slowly moving back to its old floor before the crisis hit - and vice-versa for the dollar, it seems.

As of 11:46 AM ET, spot gold was at $1,080.70 right after making a new daily high at $1,082. The $19.60 gain on the day has been divided up by the Kitco Gold Index into $10.90 due to predominant buying and $8.70 due to the weakiening greenback.

The U.S. Dollar Index, after rallying as high as 80.25 while gold was stuck in its range, had that rebound cut off at the knees as of 11:35 AM. In the next ten minutes, it plummeted to 79.89. Unlike the last test of the 80 support level between 7:40 and 8, this drop pushed through it and the Index stayed down. As of 11:58 PM ET, it was at 79.73.

The plunges in the greenback have been reminiscent of the recurrent ones in the gold market. It looks as if someone has heard about the record long position in greenback/euro, decided that the crisis has abated, and is playing hit-the-stops..


Update: The greenback slamdown continued until just before 12:25 PM ET, when the U.S. Dollar Index bottomed at 79.545. It wasn't long, though, until a swift reaction set in. By 12:45 PM ET, the Index reached 79.82 after rocketing up to 79.9050 shortly before. As of 1:31 PM ET, it was at 79.79 and set in a range after creeping upwards.

Not surprisingly, gold made a new daily high at about the same time the greenback hit its low. The metal topped out around 12:20 PM at $1,083.10 and then turned down as the greenback strengthened again. It touched $1,074 as of 12:45 PM, but later turned up; so far this afternoon, $1,075 has held. It's only been for a couple of hours, but that price as support means something: it's at the old late-December and late-January interday lows.

As morning has turned into afternoon, the split of the daily gain by Kitco's Gold Index has moved towards the greenback. As of 1:31 PM, when spot gold was at $1,075.40, the $14.00 gain was allocated to $8.80 due to weakening of the U.S. dollar and only $5.20 due to predominant buying.

The rest of the afternoon will show if the $1,075 level holds. If it does, then some chartists might have a re-think.


Update 2: Although it was close, $1,075 did hold. Gold spent the rest of the afternoon in a trading range centered around the $1,076 level, pulling up slightly near the end of regular trading to close at $1,077.60. The day's gain of $16.20 was split by the Kitco Gold Index into $9.40 for U.S. dollar weakness and $6.80 for predominant buying.

The U.S. Dollar Index didn't get back above 80 for the rest of the regular day. The upwards creep, which paused right around 1:30 PM ET, continued until 2:55 PM ET with the Index at 89.875. The greenback then drifted downwards, settling the Index into the 79.75-79.8 range where it ended regular trading. As of 5:30 PM ET, it was at 79.75.

The daily gold chart, from Stockcharts.com, shows how $1,060 has become a support level these last few days:



The series to watch, I suggest, is the relative-strength index (RSI) at the top. Through the decline since Dec. 3rd, it's been bottoming at slightly lower levels; it's also been topping out at significantly lower levels since mid-January. Currently, the gold price is recovering and the RSI is rising. What to watch for is if it tops out at well above 50, or higher than the last top. With the exception of the busted early-mid January rise, 50 is where the peaks have been. If 50 is soundly bested, then fears of another serious decline seem to be overdone...unless another curve ball comes. I should add that a Fed Funds rate hike is already widely anticipated and perhaps discounted. The most likely bolts from the blue are further trouble in Euroland or more assertive tightening by the People's Bank of China. A drop in the Chinese inflation rate may do it too.

The daily chart of the U.S. Dollar Index shows today's slump as a long-due correction...



...of a bull trend that's still rolling as of now. The Index is no longer oversold, but its RSI line still shows a bottom that typically occur in bull runs: around 50 or so. That was about the bottom level for gold when it was on a tear late last year. There's little sign of a serious reversal in the greenback as of now.

Next, two more charts that tie in to this weekend post made last Sunday afternoon. They're the five-day SPDR Gold Shares Trust (GLD) chart and the Amex Gold Bugs Index (HUI) chart, as from Yahoo! Finance:





Last Sunday, I noted that both charts had a gap in them; I treated them as "common gaps," ones that would be filled. As of today, as the latter chart shows, the Thursday gap in the HUI chart has been filled. The GLD gap has not as of yet.

The Gold:GLD ratio, as charted over at Stockcharts.com, sunk back today but is still close at a slightly-above-average value of 10.23. It's been two days since the ratio fell below 10, for the second time in a trading week. The ratio is the price of an ounce of gold (nearest futures) divided by the price of a share of GLD. Since 10 shares of GLD represent one ounce of gold, a value of less than 10 for the ratio indicates that physical gold has sold at a discount to its paper equivalent.

A Reuters report on today's trading, arranged in bullet-list form, made these points among others:

* Gold boosted by dollar drop, oil rally, global equities gains amid talk of help for debt-burdened Greece.

* Euro on track for best one-day gain since November on news of euro zone countries to help Greece....

* ETF Securities Ltd's plan to start a precious metals basket trust lifts investment demand.

* Gold's holding support on Friday, and subsequent stability suggest that downward correction could be over - CitiFX.

At this point, it's hard to say what's going to happen. As it turned out, the recent record long non-commercial position in the dollar/euro contract did serve as a contrary indicator, or as a gauge of oversoldness. You place our bets and you take your chances; the bet of a Euroland answer to the Lehman collapse hasn't panned out as of now. Gold has benefitted as the U.S. dollar has pulled back.

But, the metal has only risen back up to its bottom from before the Euromess started. The greenback still shows strength, and there's no event in the pipe that would reverse that strength. The only possible exception would be a strenghtening of the recovery, with a return to risk appetite accompanying evaporating fears of deflation. This event is more of a long pull, and its effect on the greenback is uncertain. Imports will rise with rising U.S. prosperity, pushing down the U.S. dollar, and there will be less foreign demand for U.S. Treasury securities. On the other hand, demand for U.S. risk assets - and, consequently, the U.S. dollar itself - may well go up enough to compensate.

The only unambiguous benefit for gold in a recovery would be the erasure of the "deflation discount" and a spreading of future-inflation expectations. That may well happen, but it lacks the kind of bull-power that the gold market would groove to.

And, it might be offest by a drop in Chinese inflation as their economy cools.

All told, the performance of gold today was encouraging but not very inspiring. There's not much sign that the slog is done with.