Gold Shakes Off Most Of Early-Morning Drop, Then Sinks

Fed Chair Bernanke's testimony wound up packing a bit of a punch to the market, although the asset that was primarily affected was the U.S. dollar. He said that the Fed was going to stay the course regarding near-zero interest rates, as the U.S. economy isn't yet on a firm footing. There won't be any tightening until the economy is on solid ground.

The interday chart of the U.S. Dollar Index shows a real head-fake. Just before Bernanke's testimony began, the Index ratcheted up in a five-minute mini-parabolic rally that took it from 80.63 to 80.77. Then, when he started testifying, the upsurge reversed and turned into a waterfall decline. Within three minutes, the Index plummeted from 80.76 to a little below 80.5. It recovered to the 80.65-80.7 level, spent nineteen minutes in that trading range, and began plummeting anew. From 10:31 AM ET to 10:49, the Index shed more than thirty-two basis points to end up at 80.38. The decline extended for a little more time, and then reversed course as things calmed down. As of 11:52 AM ET, it was at 80.60.

I can't say if any of those newly-minted dollar bulls were crimped by the fake-out, but I can say that some testimony-jumpers were.

Gold returned to moving in contradistinction to the greenback. After regular trading opened, the price stumbled around the $1,094-5 level before advancing as of about 9:15. That advance proved to be prescient, even if it began as a relief rally. By 10:10, the metal was at $1,104.

The subsequent pullback brought gold down to $1,098 a little after 10:20. A subsequent rally took the price back up to the same $1,104, making for a double top. As the greenback regained its strength, gold fell back: as of 11:51 AM, the spot price was $1,098.70. The $4.80 drop on the day was allocated to a $9.00 loss due to predominant selling pressure and a $4.20 gain due to U.S. dollar weakening. The early-morning drop to $1,090 did take a chunk out of the recent rally. U.S. dollar weakness has compensated somewhat.

It seems that the recently-acquired confidence, if not complacency, regarding gold's staying power is gone. Gold may recover to above-$1,100 levels and stay there, but it's fairly far from a sure thing at this point. Longer-term bulls can take heart in the now-evident skittishness.


Update: After pulling back from above-$1,100 levels, gold stopped declining at about $1,107. From 11:30 AM ET to 12:50 PM, $1,107 served as a short-term floor as the price bobbed between that level and $1,100; the latter price became a new ceiling. At 12:50, however, the price spilled below the floor and sunk to $1,094. That floor held for the next half-hour, after which gold rebounded a bit. As of 1:31 PM ET, spot gold was at $1,097.20 for a loss of $6.30. The Kitco Gold Index apportioned -$8.15 for predominant selling and +$1.85 for weakening in the U.S. dollar.

The U.S. Dollar Index completely recovered from its post-Bernanke-testimony drop, making for a whipsaw of those who bought just before it and dumped their holdings during it. After hanging around the 80.6 level from 11:30 'til noon, the Index resumed climbing in a three-step rise that took it all the way to 80.80 before it stalled. As of 1:32 PM ET, it was at 80.74.

A sustainable rise above $1,100 is still elusive; that early-morning chunk has proven to be durable. Gold may recover during the rest of the afternoon, but it still doesn't look likely.


Update 2: As it turned out, gold didn't recover to the above-$1,100 level. On the other hand, it didn't fall further. The $14-or-so drop betwen 3:45 AM ET and 4:30 AM marked the low of the entire day, matched only by a test of the $1,090 level at about 6:30 AM.

After ascending to almost $1,098 just before 1:30 PM, gold dipped and then made it above $1,098 for a brief time. A pullback to the $1,097 level preceded another try at the $1,098 level, which fizzled at 2 PM. The subsequent drop brought the metal down to $1,094, after which it slowly rose to regain $1,098 at about 4:45. As of the close of regular trading, spot gold was at $1,097.20 for a loss of $6.30 on the day. The Kitco Gold Index assigned a $7.70 drop to the predominant-selling category and $1.40 worth of gain to the weakening-U.S.-dollar category. Earlier in the day, the former category showed a loss of over 10 dollars. So, there was a minor recovery ex-greenback in the afternoon.

The U.S. Dollar Index, after a slump between 1:05 and 1:20, inched up for the next forty minutes and then rallied more strongly as it became more apparent that the 10 AM spill was indeed a whipsawing. By 2:45, the Index had gotten up to 80.88, higher than the high before the whipsaw plummet. That high, though, was the top of the session. After a dip into a range between 80.8 and 80.85, which lasted for another hour, the Index went into a two-step drop that carried it down to about 80.75 by 4:45 - the same time at which gold reached $1,098 without a subsequent fizzle. The Index then went into a tighter trading range centered around 80.77, at which it was as of 5:35 PM.

The six-month chart of gold, from Stockcharts.com like the next ones, shows that the gap that's been there since the 16th has finally been filled:



It did turn out to be a common gap. That said, the chart pattern doesn't look very encouraging. Had it not been for the fact that sub-$1,100 prices call forth buying by Indian gold dealers, indicating bargain levels, there wouldn't be all that much good to say about the metal from a look at the chart. Including that bargain-hunting potential gives a different picture even if it's interpretive: gold may be tracing a reverse head-and-shoulders pattern. Since the right shoulder hasn't been traced out, it's impossible as of now to determine whether a volume confirmation exists. But, this pit chart showes a lowered volume as compared to the decline early this month...so far. So does the companion Globex chart. (Both are for the April COMEX gold contract.) Lower volume on the right shoulder as compared to the head is one of the confirmation signals of a reverse head-and-shoulders pattern.

I merely comment, though. One of the major doubt points for such a pattern to go to completion is the still-present strength in the U.S. Dollar Index:



Despite the confusion that accompanied the 10 o'clock hour, today's entire action in the U.S. dollar looks like a fairly sedate continuation of a recent post-spike uptrend with resistance at 81. The signs still point to a continuation of that trend, with the weekly chart looking good for dollar bulls too:



The recent rally doesn't look very impressive as compared with the spike-ups in '08 and '09, which makes for an interesting difference. From the perspective of the last six months, higher highs and higher lows have been established. But, from the three-year perspective, a higher high has not yet been established - and won't be until or unless the Index rises all the way to a little below 90. The picture will become clearer once the Fed Funds rate is finally hiked up and the markets assimilate it. Where the Index will be at that point, let alone after it, I don't know.

To get to less speculative matters, the weekly chart shows the 81 area as being an important resistance level, one that was supportive in December of '08.

An afternoon report webbed by the Wall Street Journal says that the effect of Bernanke's testimony was neutral for gold, and that today's decline was caused by uncertainty:

The overall tone for gold Wednesday was to the downside as market participants were awaiting details of International Monetary Fund gold sales, the latest on fiscally strapped Greece as well as a scheduled March meeting of the U.S. Commodity Futures Trading Commission to examine speculative trading in metals, says George Gero, vice president with RBC Capital Markets Global Futures.

"You have a lot of imponderables," Gero said.

Today did break the recent resilience in the gold market, as the early-morning drop was not recovered from. The difference between that one and the more news-driven ones should be noted: this one was not news-driven, but instead was prompted by technical selling. That's the one that stuck.

The way things look, the decline isn't over; however, the influence of bargain-hunting has yet to be felt. Gold may spend some time in the sub-$1,100 zone, but where it bottoms is going to be of importance. There's still the influence of Europe to be considered.