Gold Stumbles A Little Despite Convictionless U.S. Dollar

An initial dip at the start of regular trading was partially reversed, bringing the price of the metal back above $1,120, but only briefly. As of 9:40 AM ET, gold began a slide from about $1,120.50 down to $1,112 over the space of thirty minutes. A pause in the decline saw the metal uptrack to $1,114 until 10:45 AM. Then, it fell about four dollars an ounce and hovered at the $1,110 level before rebounding again. As of 11:44, spot gold was at $1,112.20 for a loss of $4.90. All but forty cents of the drop was attributed to predominant selling by the Kitco Gold Index.

The U.S. Dollar Index has risen, but not very sustainably. It rallied above the range established earlier this morning, peaking at 80.66 as of 10:10, but has not shown much conviction subsequently. A quick pullback brought the Index back to the 80.5-80.6 level; as of 11:45, the Index was at 80.58.

The late-morning rally in the greenback was real, though. This day, unlike the past few others, there has been no predominant buying to offset. It looks like the metal's going to either pull back or take a rest today.


Update: The gold price recovered a little, despite the dollar showing a little more strength, until around 1:15 PM ET. Prior to that time, gold ascended from its daily low of $1,108.20 as made almost exactly at 11:00 AM. Climbing more than six dollars an ounce over the next one-and-a-quarter hours, gold sunk back a little to $1,114 and stayed there until the aforementioned drop. The spill from $1,114 to $1,111 took ten minutes to complete; after it, gold hung around the lower level. As of 1:20 PM ET, the spot price was $1,110.60 for a drop of $6.50 on the day. The Kitco Gold Index divided the loss into $1.00 for greenback strengthening and $5.50 for predominant selling.

The U.S. Dollar Index ticked up a little, but its rallying power hasn't been much since the last update. The rise has basically been a slow and choppy drift upwards, taking the Index above the 80.6 level. As of 1:39 PM ET, it was at 80.61.

The gold rally noted above had little conviction. As of the time of this update, gold's in breather mode.


Update 2: And that's how it went for the rest of regular trading. After hitting $1,110, gold rallied about four dollars an ounce to reach $1,114 by 2:20 PM ET. It spent another eighty minutes there, interrupted by a slight blip upwards at 3:20 PM that lasted for about ten minutes until it reversed. A post-reversal drop at 3:40 PM brought the price down to $1,112, but that level ended up being a floor for the rest of the regular trading day. Between 3:45 and the close, gold was in a tight range between $1,112 and $1,114; it closed at $1,112.60 for a loss of $4.50. The Kitco Gold Index apportioned the decline into $4.40 due to predominant selling and a mere 10 cents due to strengthening of the U.S. dollar.

The greenback rally fizzled as of 1:45 PM. From then 'til 3:20 PM, the U.S. Dollar Index entered into a slow but mostly steady decline. The high of 80.63, reached in a triple top between 3:10 and 3:30, turned into a low of 80.475 reached between 3:20 and 3:25. That slight blip in gold, peaking at no more than $1,116, occurred at about this time. Subsequently, the Index rallied with a quick start followed by a more lumbering advance; this move ended as of 4:50 with a double top at 80.575. At that point, the rally ran out of steam and the Index pulled back a little before churning. As of 5:30 PM, it was at 80.545.

This chart, from Stockcharts.com, shows the overall directionlessness of the Index today:



Note the RSI line at the top of the chart is lower for yesterday's peak than it was for February 5th's, even though yesterday's value for the Index itself was considerably higher. Based upon the behaviour of the Index when it was rallying in '08 and early last year, this failure to confirm is likely to lead to either a churn or a pullback. It's counterintuitive, especially given the greenback's unusual and largely unanticipated strength, but it's not wholly implausible given the the Index has come a long way up in not that much time. It may have gotten ahead of itself.

The MACD lines at the bottom present an unusual occurrence. One line is normally above the other, as shown by the accompanying histogram that measures the difference between the black line's level and the red's. For the last five trading days, however, the difference between the two has been near-zero; the indicator has been neutral. Precedents from the '08-09 rally suggest the opposite of the RSI's indication: a continuation of the uptrend. Putting the two together indicates a pause followed by a further rally.

The gold chart shows listlessness too, but a spell that extends over the last five trading sessions:

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Just to the left of the last five candlesticks is a gap. It looks very much like a common gap, which will be filled once gold descends to the $1,090-$1,095 level. [This chart shows the nearest-month futures contract.] A drop in gold would be consistent with a further rally in the greenback; a stop of the decline just below the bottom of the gap would be consistent with bargain buying at the sub-$1,100 level. $1,100 has provided solid support last week, but it may evaporate.

A Bloomberg report, webbed by Business Week, attributes gold's decline to worries about investment demand being impacted by the greenback's rise:

“The negative argument rests with poor investment flows and fundamentals,” said Tom Pawlicki, an MF Global Holdings Ltd. analyst in Chicago. “Investor appetite for gold as shown through ETFs has been lacking and doesn’t argue for new price highs.”

The report also notes that large speculative longs increased by 4 percent in the week ending February 16th.

In an item related to the main theme of the Bloomberg article, London-based Natixis Commodity Markets has forecasted a likely price of $950 for this year's average. Interestingly, the bearish forecast is contingent upon global recovery:

An average gold price of around $950/oz or even lower is possible this year if the global economic recovery gains pace, supporting conventional asset values and undermining assets like gold, which is seen as a store of value, London-based Natixis Commodity Markets said in a report on Monday.

“Although there remains huge uncertainty concerning the economic and financial markets, we feel the balance of probabilities favours an eventual resolution of economic imbalances, such that investor interest in gold and silver will gradually begin to unwind,” the firm said.

They expect the decline to continue into 2011, with a "probable" average of below $900 that year, at which point jewelry demand will kick in enough to support the price. I note that they consider last year's rise to be an aberration that will be drained before gold gets to normal. No bullish enthusiasm in that forecast!

From what I've seen, including an excerpt from the World Gold Council's fourth-quarter demand report, jewelry buyers are becoming acclimatized to four-digit prices for gold. Demand did weaken over 2009, but has partially pulled back from 2009's awful 1st quarter. That pullback indicates acclimatization. Reports from the Indian market suggest clearly that gold is now seen as a bargain when below $1,100.

Global recovery should stimulate jewellry demand, which will support the gold price in the absence of a large increase in supply. I don't see Natixis' forecast bearing out unless there's substantial disinvestment from gold.

The coming months will tell. Today's decline wasn't that bad, and it's kept gold in a trading range between $1,100 and $1,125. There's not much immediate cause for gloom, and there won't be unless the U.S. dollar goes on another tear upwards.