Surprising Gold Strength

The U.S. Dollar Index has been on quite a run this morning. From about 80.1 as of 9 AM ET, it's marched up to 80.50 as of one hour and fifty-two minutes later. That's close to its recent eight-month high set one week ago. It has backed off since that high point, but only partially.

This kind of strength in the greenback has, especially in recent days, accompanied a slam-down in gold. As of 11:30 AM ET, however, gold wasn't been following the script: it was at $1,082.20 and up $11.50. Surprisingly, the Kitco Gold Index divided up the gain into a $3.40 loss due to U.S. dollar strength and an unusually large $20.10 gain due to predominant buying.

Interestingly, the news item that fits both scripts is an announcement of a deal to rescue the Grecian government from its woes. It's been interpreted as being good for gold and bad for the Euro, meaning that gold's been ramping up in Euro terms since the announcement was disseminated around 9:30 AM. It's consistent with gold holding steady while the U.S. Dollar Index was ramping up.

This morning's trading has some similarily to gold's performance one week ago, the day of the big slam-down. What had previously been a large cumulative gain due to predominant buying turned out to be an air pocket. One week ago, gold was hammered down in the morning as well as in the afternoon. Today, despite the briskness of the greenback rally, gold was hardly pushed down. As the greenback pulled back, gold took off.

There's reason to be skeptical about this rally, given what happened last Thursday, but there's little doubt that gold's gotten some upward momentum. The afternoon's session will show if the momentum holds. To be frank, an afternoon slamdown looks like a no-show.


Update: There wasn't even a hint of one. The greenback stayed in a range at around the 80.10-80.15 level since the initial post, with a few pokes at the downside that cumulated in a drop to 80.07 as of 1 PM ET. Gold's run continued all the way up to the $1,095 level before backing off somewhat: even with that secondary reaction gone quiescent, gold's still well above the $1,090 level. As of 1:05 PM ET, spot gold was at $1,091.30 for a gain of $20.60 on the day. Surprisingly, the Kitco Gold Index had gold being pushed down a little due to the strength of the greenback.

An updated Bloomberg report starts off with these two causes: "Gold climbed to a one-week high in New York as signs of an economic recovery boosted demand for commodities and as some investors sought a haven amid concern over Greece’s finances." A quoted expert elaborates:

“Gold is moving along with all of the commodities,” said Adam Klopfenstein, a senior market strategist in Chicago at Lind-Waldock, a unit of MF Global Holding Ltd. “There’s some economic optimism that’s bringing in buying. People want to embrace gold with the overall risk tolerance that is coming back into the market today.”

Essentially, in other words, gold is participating in a commodity-wide relief rally. Today's rally in oil gibes with this assessment.

There have been two times in the day when gold's been hit: early-mid morning, usually right after COMEX/NYMEX trading opens, and around noon. As a hit time, the latter's been less frequent than the former. Both timeframes have passed, and there hasn't been any sustained downturn. Today's surge, if air-pockety, is well-covered enough to be treated as solid. The greenback ended up being somewhat co-operative by dropping back, allaying the worry I penned above.

The rest of the afternoon might see some unusual action...


Update 2: As things turned out, there wasn't; the gold market settled into a range not atypical for the last four hours of regular trading. The metal stayed in the $1,090-$1,095 range until about 2:30 PM, when it briefly got and stayed above the top end. The day's high of $1,097.60 was made at about 2:50. That breakthough failed to hold, and gold descended back into the same channel until regular trading ended. At the close, the metal was priced at $1,092.60 for a gain of $21.90 on the day. The Kitco Gold Index divided the day's gain into $21.30 due to predominant buying and a mere $0.60 due to strength in the greenback.

The U.S. Dollar Index did lose a lot of its strength today. but the bulk of that loss took place in late morning and early afternoon. By 1:50 PM ET, the Index had settled into a holding pattern with 80 as the floor. That floor was breached for about a half an hour, but was restored by 3 PM. At 4:30, however, the Index sunk below the 80 level again; this time, the drop was more durable. The greenback spent the rest of the regular-traing day slightly below 80 but still hugging that value. As of 5:30 PM ET, the Index closed at 79.99.

A Reuters report explains the rise this way:

U.S. gold futures ended above $1,090 an ounce on Thursday as investors turned to the metal as a hedge against currency market volatility after news that European governments agreed in principle to support heavily indebted Greece.

In other words, gold's rise was engendered by dissatisfaction with the Euro and the absence of the greenback being a compelling alternative. Crisis over, the U.S. dollar no longer's an automatic money grabber.

There's a significant echo of 2008 in the events of the last week. In both crises, the U.S. dollar rocketed up and gold plummeted. Then, gold climbed back up as interest in the grenback faded. It's evident that, although both are crisis hedges, traders buy the greenback when they hit the panic button. Gold becomes attractive once the storm is gone and the U.S. dollar no longer looks that compelling. It's possible someday that the panic button will be re-wired from "Buy Greenbacks" to "Buy Gold," but that day has yet to arrive.

A brief Marketwatch report explains the connection:

Gold's surge this morning was due to relief that the European Union's pledge to help Greece appeared to involve no sale of the precious metal, according to RBC Wealth Management. "The European Central Bank has annual gold sales pacts with member banks," said George Gero, metals analyst at RBC, in emailed comments. But the EU's pledge to help Greece, though it contained few details, led markets to believe that "Greece will be handled without having to sell gold," Gero said.

So, there is substance to the above one-two reaction; it's not merely panic.

The six-month daily gold chart, from Stockcharts.com, shows a short-term recovery that's clearly underway:



Of interest are the RSI index at the top and the MACD indicator below. The latter is on the cusp of a crossover, although at an unusually low level. The former is almost at 50, the same level at which it topped out before the hammering one week ago. Things are going to be dicey over the next few days: if renewed trouble surfaces from Euroland, to the benefit of the U.S. dollar and detriment of gold, we'll see the same fake-out on the chart. Gold would likely dive down to new 2010 lows. On the other hand, if the Eurocrisis is truly over and inflation news begins to move the market, then we'll see a more durable rally extend itself.

The chart of the U.S. dollar shows a surprising amount of interday volatility today, but with little change from the previous day's close:



According to another daily chart, this one from TFC Commodity Charts, the open interest has fallen somewhat as the later stage of the rally has continued:



One notable difference between this pause and the one in late December is that open interest is declining this time 'round, while open interest expanded for more than a week during the last psot-peak drift.

The gold/GLD indicator, calculated by dividing the price of gold by the price of one share of GLD, was surprisingly low today even though it closed at an above-average 10.23. Its interday low was 10.01, just one tick away from the 10 level that marks the gold-at-a-discount zone. The Stockharts.com ratio chart for it is here.

Today hasn't been all that surprising for the greenback, but it was for gold. Given the carnage recently gone through, however, it seems premature at this point to say that gold's on another sustained roll. Absent a black swan of the bad kind, though, the metal should stay well above last week's carnage low.