U.S. Dollar Falls, Gold Gains

The first trading of the week opened with a slight gain for gold, which turned into a slight loss late Sunday night. Despite shedding more than 6 dollars an ounce between 8:45 and 11 PM ET, the decline stopped before $1,075 was breached. Gold then began climbing until it got back above $1,080 and established that price as a support level again. Around 6 and 6:40 AM, $1,080 was tested; it held both times. Since then, the price rose to above $1,085. As of 8 AM ET, the Kitco Gold index broke down gold's $5.40 gain into $1.60 due to a weakening U.S. dollar and $3.80 due to predominant buying.

Weaken, the U.S. Dollar Index has. After a huge gain last Friday, during which the Index jacked up from below 79 to almost 79.5, the Index has slumped back in a downwards see-saw pattern. As of 8:02 AM ET, the Index was at 79.31. Its high of the day was reached just before 4 AM ET, when gold was ensconced at above $1,080.

A Wall Street Journal Online report characterizes the above-described action as gold holding steady, with some skepticism about a rally:

Spot gold traded nearly unchanged in Europe Monday, helped by a bounce in the euro against the dollar and reports of decent physical buying.

However, speculators that exited the market last week amid a market-wide selloff still aren't reentering and are unlikely to do so while the dollar remains strong and there are concerns in the market about European debt and mixed data releases, traders and analysts said....

Traders said the gold market has taken on the attitude of sell the rallies.

The same bearish factors that have weighed on the gold market in the last few weeks - People's Bank of China tightening and the rising U.S. dollar - were cited as further causes for further declines by James Moore of TheBullionDesk.com in the same article.

A Bloomberg article expresses more optimism: "Gold May Rise for First Time in a Week as Dollar Spurs Demand." The story mentions bargain-hunters coming in, but doesn't downplay it like the one above. Experts cited, though are cautious:

“The U.S. currency is the key at the moment,” Andrey Kryuchenkov, an analyst at VTB Capital in London, said today in a report. Still, “clear evidence of renewed and persistent physical buying” is needed for prices to rally, he said....

“The dollar’s sustained rally is spooking sentiment for gold,” said Hwang Il Doo, a senior trader at KEB Futures Co. in Seoul. “Signs of an improving U.S. economy are raising speculation that an interest-rate hike could come earlier than anticipated.”

The greenback is also brought up by a prognosticator quoted in a Globe and Mail report:

“Gold has done relatively well, looking at what has been happening in other commodities,” said David Thurtell, an analyst at Citigroup. “The dollar has been strong, and gold was always going to struggle on the basis of that.”

“It is difficult to see the dollar weakening further,” he said. “People have definitely been seeking out gold as a currency hedge, and if that hedge is no longer needed, that is going to cap some of the demand for gold.”

Caution still abounds, even if there are mentions that the current halt in gold's decline is due to bargain hunters. The U.S. dollar has just been too strong recently, and the spooking that the PBoC tightening has caused is still too remembered. Before the latter got rolling, gold was technically strong and on a roll above $1,160. Now, it's more than seventy dollars below that figure.

Further adding to worries is the state of the largest gold ETF, the SPDR Gold Trust. This Reuters report discloses that the Trust's holdings shrank 1.9% in January. Embedded therein is another cautionary forecast:

Analysts fear sustained outflows from gold ETFs if investors' attitude towards bullion sours, which could prove a drag on prices.

"Gold and silver investment demand has waned since the end of 2009, particularly as the U.S. dollar rebounded versus the euro," said BNP Paribas analyst Anne-Laure Tremblay. "In this context, most ETFs saw net outflows in January."

"Going forward, we expect gold to trend lower until the third quarter of 2010, and as a result, net investment demand generally for precious metals -- and therefore inflows into ETFs and exchange traded futures -- should be more subdued than at the same time last year," she said.

Speaking of the SPDR Gold Shares Trust (GLD), I found out (thanks to a commenter on this thread at Zero Hedge) that George Soros has indeed gone long gold in a big way. His fund now has more than 5% of its holdings in GLD, or 2,450,320 shares. According to GuruFocus, all of those shares were added between June 30th and September 30th of last year. As I suspected when his comment about gold as being in "the ultimate bubble" went viral, he was talking his book.

The gold:GLD ratio, as shown in this Stockcharts.com chart, closed at a normal 10.21 last Friday. The range that day showed that GLD shares were trading at a miniscule discount to gold itself, relative to normal levels. There hasn't been any extreme readings all last week. To remind, this ratio is presented as an item of reader interest.

Moving back to the greenback, this Stockcharts.com chart of the U.S. Dollar Index show how high it got last Friday:



What I'd like to call attention to is the RSI index at the top. The greenback was pushed up to the point where the RSI got into oversold territory for the first time since Decemer 21st and 22nd. The last time it got into oversold range, the greenback slumped back. Now, the greenback is slumping to the point where the above-70 level will only be breached for a single day instead of two. Note that, at the depths of the last low, the RSI got only slightly below 50. Bottoming at that range is characteristic of a bull market - hence the caution about gold's near-term fate expressed above.


As 9 AM approaches, gold is hanging steady while the greenback continues to slump. As of 8:55 AM ET, the U.S. Dollar Index has sunk further to 79.26 after reaching 79.19 at about 8:50. That near-term low point sliced off well over 50% of the greenback's Friday gain; the cause mentioned is the $1.6 trillion budget deficit projection figure. As for gold, the allocation of its gain by the Kitco Gold Index shifted more to U.S. dollar droppage in consequence. As of 8:58 AM ET, gold's $4.50 gain was split into $2.80 attributed to the greenback and $1.70 to buying pressure. Spot gold itself, as of 9 AM ET, was quoted at $1,085.40. A run up to the $1,090 level, as reached just before the New York market opened at 8:15 AM ET, was aborted.


If I may offer a brief comment to end this post, there's a lot of caution - and even bearishness - in the face of some resiliency in the gold market. Granted that a surge in the greenback will be a game-changer, but it's widely expected at a point when the U.S. Dollar Index has reached an oversold level. It may be contrary rather than contrarian of me to note the above, but I'm fairly sure that $1,085 will hold while the greenback takes a rest.