Gold Still Drifting Despite Greenback Strength

Evening trading began with a slight dip, which was reversed within a half an hour. Instead, the gold price made a run at $1,100, besting it briefly just after 7 PM ET. That rise unsustained, gold drifted downwards to the $1,097 level until just before 10 PM. Then, it went for a two-stage tumble that carried the price below $1,090 by 11:30 PM. Despite that test, $1,090 held.

As yesterday turned into today (ET), the price drifted just above the $1,090 level. A small rally was cold-decked around 2:40 AM, driving the metal down to $1,088.10. Again, the $1,090 level held, establishing a trading range that kept gold in between $1,090 and $1,095. The range was next tested on the upside, at 7 AM, but it ended up holding again. As of 7:56 AM ET, spot gold was at $1,090.90 for a loss of $6.30 since yesterday's regular-trading close. The Kitco Gold Index partitioned the decline into $2.65 due to predominant selling and $3.65 due to strengthening of the greenback.

The U.S. Dollar Index started off sluggishly, with a slight rise turning into a drop that ended at 80.73 at 6:30 PM. That low proved to be the low of the day. An accelerating upturn pushed the Index up to 80.975 before topping out at around 8:20. A saucer-like movement followed, with downdrift turning into updrift as of 9:20. At that point, the Index was only slightly below 80.9. Another accelerating uptrend ensued, taking the Index up to 81.125 just before 11:30 - the time when gold got knocked down.

The next six hours saw the Index move dowwards, in a smooth-starting but slow decline that turned more ragged but faster as it matured. The Index got all the way down to 80.795 as of 5:20 AM. At that point, the decline reversed and the Index laboriously pulled back up to the 91 level. As of 8:10 AM ET, it was at 80.97.

A Wall Street Journal Online report ascribes the overall decline to a fall in the euro and a slump in U.S. stock futures. Expectations for the metal in the coming days don't seem to be very optimistic:

"[Bernanke's] assurances that interest rates would remain low imply ample liquidity will help put a floor under gold prices, we believe, and will keep the opportunity cost of owning gold low," said HSBC analyst James Steel.

However, a drop in the price of gold, in both U.S. dollar and euro terms, indicates underlying weakness for the metal and further short-term losses appear likely, he said....

Mr. Bernanke will also give his second day of testimony in the Senate later Thursday and a batch of data is due. Trade will therefore be "choppy," said James Moore of TheBullionDesk.com. Gold is vulnerable to more losses, having failed to tackle key technical chart points last week around $1,127, Mr. Moore said.

A stronger dollar was given as the main cause by a Bloomberg report, webbed by Business Week. Weakness in the Euro was ascribed to fears that Greece's debt will be downgraded.

The “lower gold price is dictated by the weakness in the euro,” said Bayram Dincer, a commodity analyst at LGT Capital Management in Pfaeffikon, Switzerland. “Short term, higher risk aversion will not benefit gold, as this risk premium is already incorporated in the gold price.”

Another quoted expert is less than sanguine about the near-term future for gold:

“Investor money looking for safe assets should be the factor” driving gold lower, said Tetsuya Yoshii, vice president for derivative products with Mizuho Corporate Bank Ltd. in Tokyo. Bullion “might have a $20 to $40 correction on the downside,” he said

The rest of the story mentions another, perhaps related fear: commodites will come down as the global-recovery trade unwinds for having jumped the gun. The implications for stocks in that forecast aren't brought up. Also mentioned is SPDR Gold Trust (GLD)'s holdings, which were unchanged at 1106.99 tons yesterday.

A Reuters report, while concurring with the above two about dollar strength pushing down gold, also attributes technical factors to the drop. The $1,100 level, unsustained, meant confidence was lacking. The first quoted expert seems less gloomy than those above:

"The perception is we're back in a period of a little bit of limbo," said Darren Heathcote, head of trading at Investec Australia in Sydney.

"Now we need to get things started again. Either we are going to go downhill further or we are going to continue with a recovery. I think we are just waiting for some impetus to push us in one direction or the other," he added.

Near the end of the article, a managing director of the Market Strategy Institute in Tokyo, Koichiro Kamei, was quoted as opining that worries about the CFTC tightening position limits may be inducing funds to cut back on their own long positions, swamping demand from Asian physical-gold buyers in the short term.

The jobless claims number have been released, and it isn't a very good one: 496,000, well worse than expectations for a drop to 460,000. Durable good orders, however, were much better than expected for January: a 3% gain instead of the expected 1.4%. Airplane orders proved to be better than expected. Once the transporation data is stripped out, though, a decline of 0.6% is left.

Despite that news giving an added push to the U.S. Dollar Index, which had attained the 81 level just beforehand, gold has remained in the $1,090-$1,095 range. The push to the Index proved to be short-term: after tracking out a declining wedge between 8:32 and 8:43, which included that just-mentioned push, the Index broke through the floor of that wedge. As of 8:47 AM ET, it got below 81 but rallied above later.

Gold was directionless since the start of regular trading, but started to rally as the greenback pulled back. As of 8:48 AM ET, it was at exactly $1,095.00 for a drop of $2.20. At that time, the Kitco Index actually had a small boost from predominant buying.

So far, there have been no declines other than ones in markets that trade overnight.