Gold Price Dip Down On Resumed U.S. Dollar Strength

The greenback is still holding in its trading range between about 80 and about 80.5. As of about 9:15 AM ET, the U.S. Dollar Index ascended above 80; it continued inching up until about 10:30, when the rise accelerated. After pausing at the 80.22 level, the Index has kept moving up; as of 11:48 AM ET, it was at 80.33 after reaching as high as 80.395 as of five minutes previous.

Naturally, that rise has taken its toll on the gold price. After reaching above $1,125 at the beginning of regular trading, gold fell about seven dollars an ounce between 8:05 and 8:30. The better-than-expected housing starts news did mollify the decline, but it seems to have had a strengthening effect on the greenback. After ranging between $1,118 and $1,120 from 8:30 to 9:15, gold dipped another two dollars an ounce before rallying somewhat. That rally fizzled as of 9:50, as did another half and hour later that topped out at a lower $1,120. Since then, gold was trending downwards in counterpoint to the greenback's rise until it stopped below the $1,112 level. As of 11:49 AM ET, spot gold was at $1,113.40 for a drop of $3.90. The Kitco Gold Index had gold down $9.80 due to strengthening of the U.S. dollar, leaving a gain of $5.90 due to predominant buying.

As the Kitco Index shows, there's still hidden strength in the gold market. The price of the metal may continue to fall, but not by much. The $1,110 support level looks like it's going to hold up today.


Update: It has so far. After the original post, gold pulled up more than five dollars an ounce to reach just below $1,118 as of 12:20 PM ET. Then, it slid back to the $1,115 level just before 1 PM. Afterwards, the metal zipped up four dollars an ounce to reach $1,120. A double top was formed, with the tops being reached at about 1:12 and 1:22 PM. Subsequently, as of 2:05 PM, gold fell back to $1,114.60 for a loss of $2.90 on the day. The Kitco Gold Index has a $8.80 gain due to predominant buying pressure and a $11.70 loss due to the strength in the U.S. dollar; both add up to the $2.90 loss.

The greenback hasn't gained much since the last update, but it has gained. After falling back to the 80.25 level, reached at about 12:25 PM, it later recovered, reaching 80.415 by 12:55 PM. A pullback to the 80.3 level followed, with a recovery to a slightly higher level afterwards. As of 1:58 PM ET, the Index was at 80.41, but a leap-up all the way to 80.52 took place at 2:01 PM. That leap was partially erased a few minutes later.

Gold's still stuck in a holding pattern, but the greenback hasn't really pulled it down.


Update 2: Not until later in the afternoon, that is. As it turned out, strength in the U.S. dollar did create somewhat of an air pocket. The decline that started just before the last update continued until just before 2:30 PM ET when gold bounced off the $1,110 level. Then, followed a five-dollar bounceback that lasted until 3:40 PM. The price drifted back down again, slowly, until 4:30 PM; at that time, the price plummeted to about $1,106. A short uptick was followed by another decline that took the price down to $1,103.40. After that second drop, the price stabilized on a solider basis and spot gold closed regular trading at $1,106.80 for a loss of $11.00. The Kitco Gold Index still credited gold with a gain due to predominant buying, once U.S. dollar strength was factored out, but not by much. Instead of the multi-dollar figures above, the allocation due to predominant buying at the end of the day was $0.50. $11.50' worth of drop was attributed to U.S. dollar strength.


Perhaps the reason why gold did so well in the predominant-buying category, despite U.S. dollar strength, was because of an expectation that the U.S. Dollar Index would pull back later in the day. It didn't; the gains made since the last update not only held, but they also were extended a little. The Index jumped all the way to 80.53 around 2:05 PM, but pulled back in the next forty minutes. By 2:45, the Index was below 80.4. Then, a lumbering rise got underway which lasted until 4:35 PM; at about that time, the Index made a double top at the same level as the 2:05 window. Instead of a reversal, though, the Index pulled back slightly and churned in a trading range centered around 80.48 or so. As of 5:30 PM, it was at 80.47.

Despite that last-minute drop, gold's held up fairly well today. This Stockcharts.com chart shows a holding pattern:



The action over the last week, from a chart-scryer's perspective, contains some grist for optimism. Today's high managed to slightly beat Feb. 3rd's; on that day, gold topped at just below $1,125. This day's high, (which is of the nearest futures) was just below $1,128. The most recent low was Feb. 5th's $1,044, which was much lower than Januay 28th's low of $1,074. The pattern from January 20th to today resembles two-thirds of a reverse head-and-shoulders bottom.

Before continuing, I must say that there was a similar pattern from mid-December to early January, which was busted by the People's Bank of China's first reserve-requirement ratio increase on Jan. 12th. Even if this pattern completes according to the textbook, there's still the chance that the price will still be knocked back down by an untoward event.

If it follows the script, though, gold will decline again in the coming week or so but level off at well above $1,050. It doing so would fill the gap between yesterday's price action and that of the day before, establishing a common gap. Then, it would rally up to about $1,125, perhaps pause or backtrack a little at that level, and then rise solidly above $1,125. The rationale for such a pattern would be increased demand for gold, all over the world, as signs of global inflation become more evident. More specifically, demand quickened by the Eurocrisis would continue to kick in as Euroland inflation becomes more widely anticipated.

However, a sustainable rally depends upon a reversal in the two-month trend made by the U.S. dollar. As this other Stockcharts.com chart shows, there's no drop in evidence as yet:



Instead, there's a wide trading range that has held up - a very wide one of late; almost the entire span has been covered over the last two days. If there's any adjective that can be used to describe the U.S. dollar's action over the past two days, it would be "indecisive." There really isn't any near-term precedent for this kind of indecisiveness, but the last time two opposite-colored candlesticks stood side by side on the chart was on January 6th and 7th. The Index took off in the same direction indicated by the most-recent candlestick. In the case of today and yesterday, that direction would be "up."

The only demur I can think of to the above guess would be the crowdedness of the U.S. dollar trade. There are more than enough many non-commercial longs on the U.S. dollar side to make a contrarian wonder.

In making that guess, I may be too chart-happy with respect to gold; 'tis true. Next day's trading will bring a clearer picture in both markets, interlinked as they are.