Post-Hike Hangover Not That Bad

In fact, it's been pretty good. After regular trading opened, gold fell five dollars an ounce to a litle above $1,107 but it reversed course for a brief period. That reversal, which was followed by a drop to just below $1,107, proved to be a portent. Aftter that second dip, which ended at about 8:45 AM ET, gold climbed in a choppy fashion all the way up to $1,116. That level, reached at 9:45, made for a short-term top; in the next thirty-five minutes, gold dropped six dollars an ounce. That $1,110 bottom, though, marked the start of a rally that took the metal all the way up to $1,118.20. As of 11:56, there had been a small pullback; spot gold was at $1,116.30

The earlier decline was prompted in part by a resurgence in the U.S. Dollar Index, which traded choppily in a range until an advance got rolling as of 9:42. That move carried the Index from just above 81 to just above 81.2 by 10:19. In that time, gold shed the above-mentioned six dollars an ounce. Subsequent to its peak, the Index slid down to just below 81 in the next hour. Since the end of that drop, it was creeping upwards in a relatively narrow range that coalesced between 81 and 81.03. That range was bent as of 11:50 AM ET and was broken on the downside; as of 11:58, the Index was at 80.97.

The Kitco Gold Index had gold's overall gain of $8.20 split into a drop of $1.10 due to U.S. dollar strength and a gain of $9.30 due to predominant buying. What's remarkable about gold's performance is that yesterday afternoon-evening's panic drop is well on its way to being shaken off. Perhaps that's because people realized that the Fed's discount-rate hike wasn't a real tightening.

The rest of the day's trading may see gold go all the way to the near-$1,125 level it was at before the announcement. Whether that pans out or not, the gold market has been resilient.


Update: Things wound up moving faster than I had expected. At about the time of the original post, as luck would have it, the U.S. Dollar Index went into a waterfall decline and gold shot up. The $1,125 level was not only met but also exceeded, as of just before 12:30 PM ET.

Gold traced out a double bottom at about $1,116 as of 11:50 AM ET. Subsequently, the metal went for a run that carried it up to the $1,122 level. After reaching it at about 12:12 PM, gold pulled back about four dollars an ounce and then headed higher. After 12:30, the metal entered into a range between $1,122 and $1,125. That's good enough to say that the Fed-induced panic decline has been erased. As of 1:18 PM ET, gold made a triple top that also looks like a very small inverse head and shoulders. As it turned out, the bearish triple top prevailed in the immediate term.

That range break I mentioned in the original post turned into quite the drop. It took only six minutes for the U.S. Dollar Index to go from the 81 level to 80.78. Two attempts to rally back only made it just above 80.86; as of 12:25 PM, the Index had slumped even lower at the 80.75 level. A third attempt to break above 80.86 was made, cresting at 80.875 as of 12:44. Subsequently, the decline resumed; as of 1:31 PM ET, the Index was at 80.72 after rebounding from the 80.65 level. Just as gold recovered, so it was that the Index gave up its gains. In the near term, gold isn't mirroring the greenback because the former got somewhat ahead of the latter.

As of 1:24 PM ET, gold dipped a little below the range as the greenback recovered somewhat; the spot price was $1,120.60. The Kitco Gold index had the $12.20 gain on the day partitioned into $2.90 due to U.S. dollar weakness and $9.30 due to predominant buying. Of note is the fact that gold went back to where it was before the Fed announcement, but the U.S. Dollar Index hasn't. Thirty more basis point would have to be lost for it to do so.


Update 2: The U.S. Dollar Index didn't quite make it down to its pre-Fed-announcement level, but it came close. Despite the continuance of its drop, gold fell slightly in the rest of the afternoon. As things turned out, gold did get ahead of itself with respect to the greenback.

The metal's high of the day was reached through the above-mentioned triple top, made between just before 12:30 PM ET and just after 1:00. The floor of a brief range established at the same time, at $1,122, was broken as of 1:25 PM and was never regained throughout the rest of the session. A pause at the $1,120 level held until about 1:50; after which, another range developed with $1,120 now serving as the ceiling and $1,118 the floor. Just before 3:00, a short spike up to $1,122 took place; it was prompted by a fall in the greenback slightly earlier. That spike-up didn't last, and $1,120 became the ceiling again as the range was re-established. 3:50 saw a break in the floor, leading to a downwards spike that stopped at the $1,115 level. The rebound was only partial, though, and led to a third downstep in the ranges: this time, $1,118 was the ceiling and $1,116 was the floor. At the time of the 3:50 spike, the U.S. Dollar Index attempted a rally that later broke down. That breakdown, though, didn't give any push to the gold market as the close approached. At the end of the week, spot gold closed at $1,117.10 for a gain of $9.00 on the day. Last week's close was $1092.40, so gold ended up with a week's gain of $24.70, or 2.26%.

As noted above, the U.S. Dollar Index continued to decline for the rest of the afternoon session. The first wave ended as of 1:50 PM and saw the Index reach 80.605. A secondary uptrend lasted twenty minutes and took the Index up above 80.7. That point marked the second wave of the decline, which climaxed with a drop that ended as of 2:55 PM and took the Index to 80.57. A trading range then developed, which was tested on the downside at about 3:20 and was bested - briefly - on the upside between 3:50 and 4:00. The third wave carried the Index down from 80.665 to 80.515 in the space of twenty minutes. Another rolling secondary uptrend pushed the Index lower yet again. As of 5 PM, it ended the week at 80.52. Last week's close was at 80.24, so the Index gained 0.28 over what proved to be one of its wilder weeks.

The Kitco Gold Index divided the 9.00 gain into $5.50 for the weakening U.S. dollar and $3.50 for predominant buying. During the interday period, the Kitco Gold Index (KGX), which prices gold in terms of the same basket of currencies that make up the U.S. Dollar Index, reached about 908 right before 1 PM, and may have set a record. This one-year chart of the KGX as plotted with gold shows record high values for both at the beginning of December:



The high was reached on December 3rd for both gold and the KGX; the latter's was between 905 and 910. Unless the Dec. 3rd interday was definitely higher, today's interday result is in contention for a new record high. Had the U.S. dollar not shown the strength it has over the last two-and-a-half months, and stayed pat at its Dec. 3rd level or continued downwards, gold itself would almost certainly be at a new record high. That being said, the KGX closed at slightly above 900; on a daily-close basis, the record was not broken. But, it's near - and the channel it's been in from mid-December to last Monday was definitely broken on the upside.

Turning to the chart for gold itself, supplied by Stockcharts.com as usual, this week's action doesn't look very impressive from a six-month's standpoint:



Except for Monday's jump, this week's candlesticks show a trading range with the $1,120 level proving to have real resistance to further increases. Both of the indicators - the RSI on top and MACD on bottom - show a fairly strong technical picture: the former's at levels last seen in mid-January, and the latter is solidly in a bull pattern. The only trouble being, gold itself hasn't performed all that well despite the improving technical picture. As indicated above, this laggishness is due to strength in the U.S. dollar. Its source, however, doesn't change the performance. The current chart pattern resembles a reverse head-and-shoulders more and more, but gold has to pull back on more than an interday basis in order to form a proper one. Last Wednesday and Thursday saw two news items that threw gold for a loop: the IMF market-sale announcment and the Fed's discount-rate hike. Both were shrugged off.

I have to say that the technical position of gold is pretty murky right now. If the metal got and stayed above the $1,120-25 resistance band, it would be in for a nice run. There's one spoiler, though: the still-present and far more unambiguous strength of tht U.S. Dollar Index. This chart shows it:



Like gold's the Index's MACD lines are in a bullish arrangement. Unlike gold's, the lines are very close to crossing towards the bear side. They haven't yet, and today's action makes it unlikely that they will unless something unanticipatedly awful happens to the greenback on Monday. Note that the 50-day moving average, graphed in blue in the middle field, has risen above the 200-day average (graphed in red.) It'd be hard to find a technical analyst who would argue that the crossover was not a bullish sign for the greenback. Surprisingly, the RSI at the top has not moved into oversold territory. Note that when the Index stops falling, the RSI is still in pretty high territory. That shows the stamp of a bull market. Also note that playing the MACD cross on the bull side would have led to a huge gain, while doing the same on the bear side wouldn't have been all that profitable.

All of these factors say that the U.S. dollar will keep rising enough to play hob with the net-export section of this quarter's U.S. GDP. They also say that any reversal of the trend would be of a black-swan character. The only real hope for gold bulls (and/or dollar bears) is that the strong two-and-half month uptrend has been caused by the greenback carry trade unwinding. That unwinding is like short covering: it has to end sometime. So far, the rally has taken the Index about half-way between the November 25th low and the March 3rd high. The next serious resistance is found at the 82 level - and I had to dig that level up by going back to May. There's still the question of the long-dollar trade being hugely popular amongst speculators, but those speculators that hung on have seen a nice profit. The only immediate hope for a reversal of the rally rests on contrarianism, which does tend to be too early when the old "irrational exuberance" slips in. The only potential hope is for a black-swan event that wouyld knock down the greenback (and likely re-establish the carry trade.) The only anticipable one I can think of would be a Fed-orchestrated devaluation to goose the GDP number a little. That possibility seems unlikely before the first quarter's number is released...and it's unlikely period if the Fed would rather scotch the carry trade. Fed economists may have concluded that the yen carry trade exacerbated the Lost Decades because it was a drain of economic-recovery prospects.

Again, the picture is murky. It's no secret that gold hasn't done that badly in raw terms; in Euro terms, it's done well indeed. Gold now has rebound power when upsetting news is disseminated. There is, however, the headwind that is the U.S. dollar still exerting its influence. Right now, gold is in a race between global inflation and a U.S.-net-export catastrophe.

Thanks for stopping by, and the best for the weekend. This week, as with the last, there are reasons to be sanguine. Might as well enjoy them along with the weekend.