After Morning Spill, Gold Recovers

The beginning of regular trading was an awful time for gold, but real resilience showed up later in the morning. Starting at 8:15 AM ET, gold plummeted about 10 dollars an ounce to $1,107.60 before quickly pulling back up to above $1,112 by 8:50. That recovery rally was the start of a new and larger one, with two pauses, that lasted until 10:10 AM and $1,118. The range that prevailed since 5:30 AM, between $1,115 and $1,120, was restored until just after 11:30. If the 8:15-8:45 plummet was prompted by enthusiastic shorters, said shorters have some wounds to lick unless they got out quickly.

After an hour's worth of pause, the rally resumed. As of 11:52 AM ET, spot gold was at $1,122.60 for a loss of only $1.10 on the day. The Kitco Gold Index had a plus for predominant buying, in the amount of $1.70; a $2.80 decline was attributed to U.S. dollar strengthening.

The U.S. Dollar Index managed to make it above 80.8 between 8:30 and 8:50, but it pulled back to 80.6 by 10:10. Since then, the Index has recovered to below the 80.7 level. The porousness of its resistance levels is still evident, but rallies are still capped off by spikes. The peak for the Index was 80.847 at about 8:40. As of 11:56 AM, though, it was at 80.62.

The rise of the greenback above the 80.5 ceiling only added to gold's recent woes, which have been fading. The afternoon part of the session will see if that recovery to the $1,120-$1,125 level will be surmounted.


Update: The rally continued until gold hit a smidgen above $1,125, almost exactly at noon ET; it then backed off. Apparently, today's declines are being shrugged off as a spate of scare. Gold's performance since 8:45 AM has the earmarks of a classic technical rebound from oversoldness.

However, there's now real resistance at $1,125; the metal failed to surmount it, and drifted down to somewhat above the $1,120 level. It looks like the $1,120-$1,125 trading range of last night has been re-established. After hitting $1,125, gold dawdled in the $1,122-$1,124 range until 12:50, when it briefly poked through the lower bound. It later pulled back up to $1,122, but the wind had clearly left its sails. As of 1:46 PM ET, the spot price was at $1,120.60 for a drop of $3.10 on the day. The Kitco Gold Index had predominant selling, instead of buying, taking $1.45 off the price. Greenback strength was fingered as taking $1.45 off.

The U.S. dollar is still up on the day, with 80.5 now serving as resistance, but it has come down since early this morning. After pulling up to 80.7 as of 11:20, the U.S. Dollar Index has declined as resistance just above 80.6 was broken through. The decline accelerated once that resistance was broached. Evidently, Grecian Prime Minister Papandreou's earlier warning cry about the Eurocrisis spreading if Greece gets worse is being shrugged off.

Despite that sink, 80.5 is still blokcing any further fall. That's the level slightly above where the Index bounced off as of 1:13 PM before it recovered. As of 1:48 PM, it was at 80.54.

At least, the decline of yesterday isn't going to be built on much today thanks to that diminishing-fear rally. It may be optimistic of me to say so, but gold still has a shot at erasing today's loss at the close.


Update 2: It didn't, but it was close. At the end of the day, spot gold closed at $1,122.20 for a loss of $1.50.

After slumping down in the early afternoon, the metal drifted along in a trading range bracketed by $1,120 and just above $1,122 from 1:30 PM ET to 3:25. Then, it dipped down to $1,118 before climbing back up for the rest of the day. The loss of $1.50 was apportioned by the Kitco Gold Index into -$0.20 due to predominant selling and -$1.30 due to the greenback strengthening.

80.5 did hold up as a resistance level for the U.S. Dollar Index, which was 80.58 as of 5:25 PM. After slowly rising to 80.62, reached at 3:25 PM, the Index drifted downwards to below 80.55 and stayed at that level until near the end of the session.

The performance of the greenback did make a hash of my earlier comments about the strength of the 80.5 resistance level, as its chart (from Stockcharts.com) shows:



On the other hand, the close above 80.5 wasn't much over. The Index is still stuck near the 80.5 level, but the action of the last week looks mildly bullish. As a matter of interest, I note that the 300-day moving average [the blue line] is no longer turning down. Both that and the fact that the 50-day moving average [the red line] is above it, are considered bullish by technicians. So, I should add, is the fact that the Index has basically gone nowhere even though the MACD lines at the bottom of the chart are in a bearish configuration. The RSI line at the top bottomed at the 50 level, which is also bullish.

So, even if 80.5 once again becomes a resistance level, the charts suggest that the greenback will rally once it gets over its current funk. It's not necessary for a crisis to be the driver; a continued U.S. recovery might do the trick. In that eventuality, the rise will be slower but there's likely to be one - to the detriment of exporters. A rise in the greenback would make imports cheaper, though, which would lead to price cuts and an inducement to spend more. Sad to say, but a rising greenback may be good for the GDP overall. That confluence would put a headwind in front of gold, also because a drop in import prices would lower reported CPI figures somewhat.

The month-long uptrend for gold was shaken this morning, but its daily graph shows that it's not shaky:



The low that bottoms today's candlestick figure, perhaps by coincidence, touched the 50-day moving average. The bounce-off can be cited by technicians as evidence that the average is now acting as a support level for gold, which would make gold's trend still bullish in the short term. At the open/close level, the $1,120 support level did hold although it was porous. If gold rallies tomorrow and stays up, the chart will look like a near-textbook case of an uptrend on this kind of chart. The higher low will have bottomed out from an earlier high. Of course, the real low would have bottomed out at a significantly lower level.

I'm begging the question, of course: will it rise tomorrow? The kneecapping this morning came as a real surprise; I can't say there won't be more coming. I can't even point to any near-term fundamental driver that would push gold well above these levels. At this point, it's an open question whether gold will rally tomorrow and keep moving up in confirmation of the recent uptrend. The tale will be told in the telling, not in the foretelling (at least, not from any here.) The recovery was encouraging, but a lot of it was due to real or anticipated bargain hunting. That succor doesn't last when the price goes up.

A Wall Street Journal Online article has this to say about the recovery from the spill: the U.S. dollar, pushed up with the yen by bearish comments about the soundness of Euro-denominated debt, sunk as risk appetite returned to the markets; hence, gold rose along with crude oil. At least one trader said that both bargain-hunting and short covering influenced the recovery:

Frank Lesh, broker and futures analyst with FuturePath Trading, said some traders used the pullback in gold prices over the last few days as a buying opportunity.

"It doesn't look like anybody is chasing the price [on strength], but they are willing to come in on the dips," he said.

Additionally, there was short covering, said Lesh and others.

Tomorrow is going to be an interesting day. The state of the market suggests a short-term bottom, but that may be upset by another disappointing or alarming news item. It's still too early for me to say outright that the bottom of this phase is in.