Gold Slumps Overnight, Pushed Down By Greenback

The greenback bull market is back, pushing the U.S. Dollar Index to a seven-month high. Shortly after 7 PM ET, the Index made a run at 79.5, which crested as of 8:10 at 79.52. The greenback backtracked to a range centered around 79.4 before making another run upwards early this morning. That upwards move lasted more than four hours and took the Index up to its multi-month high of 79.712. Another pullback took the Index down below 79.6, leaving it in a range between that number and 79.56.

Gold dropped, of course, but the $1,100 level held nonetheless. The first rise in the greenback pushed it down less than five dollars an ounce, and the $1,105-$1,110 range held until early this morning. The first test came on the upside, shortly after midnight ET, topping out at $1,111.50. Because of the rising greenback, though, the range was broken through on the downside as of about 4 AM ET. Gold then fell into a lower range, bordered by $1,100 and $1,105. The morning low was made almost exactly at 6 AM; thanks to coincidence's workings, the value of that low was exactly $1,100.00.

As of 8:10 AM, according to Kitco, gold was at $1,102.20 and was down $7.10 on the day. The Kitco Gold Index has the metal down $2.30 due to U.S. dollar strength and $4.80 due to predominant sellling. Even though the greenback has retreated from its 7-month high, gold has not advanced back to the above-$1,105 level it was at when the U.S. Dollar Index was last at the level it was at as of 8:10.

The greenback's rise, prompted by fears of more bad news from Euroland and an expectation of no rate hike by the European Central Bank, was identified as the cause of gold's drop by a Reuters report.

The prospect of further gains in the dollar, which would cut gold's appeal as an alternative asset and make dollar-priced commodities more expensive for holders of other currencies, is seen as a risk for precious metals this year.

"We are looking at the likelihood of dollar strength this year, primarily based on Fed (monetary policy) tightening," said Deutsche Bank's head of research Michael Lewis.

"On the forex side we have a target of 1.35 on the euro/dollar, and that is the reason we are slightly bearish on precious metals," he added. "We are not imagining a significant correction, but this is a dollar story."

Also noted in the report was the first change in the holdings of the SPDR Gold Trust since January 19th. The held gold dropped from 1,111.92 to 1,110.34 tons, for a loss of 1.58 tons yesterday. Indian demand was noted in the report as being tepid at these prices.

A Bloomberg report, webbed by Business Week, notes the same cause.

“Fiscal worries in the euro-zone countries weighed on sentiment,” fueling demand for the dollar, Darren Heathcote, an analyst at Investec Bank Ltd., wrote in a report. “Higher U.S. interest rates are also seen as denting the appeal of gold.”

The euro has dropped 3.3 percent against the dollar this year on concern Greece and other so-called peripheral nations will face increasing difficulty in curbing budget deficits that are in excess of European Union limits. Greece, Portugal and Spain have suffered a “permanent” decline in competitiveness since joining the euro, European Monetary Affairs Commissioner Joaquin Almunia said yesterday.

Also included in the article is an optimistic note from James Moore, who predicts that gold will eventually get up to $1,500/oz. His forecast is gone into more detail in this report. Suffice it to say, he professes bafflement at the safe-haven status of the U.S. dollar given U.S. deficits, monetary-base expansion, etc. He also holds out hope for increases in Chinese investment demand as inflation bites.

As 9 AM approached, the greenback is rallying once again. The U.S. Dollar Index broke out of its 79.56-79.6 range on the upside, shooting up to 79.673 as of 8:48 AM. Partially responsible was unexpectedly high new jobless claims and slightly less-than-expected productivity gains. As of 9 AM ET, gold was down $8.20 on the day as the economic news influenced the gold market too. The decline was mostly due to predominant selling - $4.50 worth.