Came The Spill...

I expected a pullback in gold today, but not the tumble that it took. Regular trading started with a range being established just above $1,138, but the metal dropped to $1,133 between 9:10 and 9:15 AM ET. A relief rally didn't last, and gold was back at the $1,134 level just after 10 AM. Then, another drop started slowly but picked up momentum; by the time it ended, just before 10:45, gold had shot down to $1124.90. Another relief rally, pulling the metal back up to $1,132, was less ephemeral; a temporary floor was established at the $1,130 level, which dissolved around 11:50. As of 11:51 AM ET, spot gold was at $1,128.80 for a loss of $10.30 on the day. The Kitco Gold Index attributed only $1.70 to predominant selling, and a full $9.10 for U.S. dollar strength.

The greenback has come back, in a solid four-stage rally that started just after 8:30. By 10:33 AM, the U.S. Dollar Index was at 80.56, which resulted in an air pocket developing in gold that was deflated at about the same time. Subsequently, the Index drifted down to just above 80.4, after which it slowly rose until 11:31 AM. Then, it popped up to 80.585. Afterwards, it rose slowly above the 80.6 level. As of 11:53, the Index was at 80.63.

Today hasn't been all that good for gold, even if a large majority of its drop has been greenback-related. The afernoon will show whether or not things get worse.


Update: They haven't. The U.S. Dollar Index drifted downwards since the time of the original post until 1 PM, in a choppy slide that took it down to 80.52. Since that time, it's pulled up in a more defined and less raggedy rally. As of 1:44 PM ET, it's slightly above where it was as of the time of the original post: 80.645.

As the greenback sunk, gold rallied. From 11:45 AM to 1 PM, the metal added about six dollars an ounce to get back up to $1,134. Since then, it's dropped. As of 1:47 PM ET, the spot price was $1,131.80 for a loss of $7.80. Interestingly, the Kitco Gold Index has a 90-cent gain due to predominant buying as of that time, implying that the rise in the greenback more than explained the day's drops. The loss attributed to a strengthening U.S. dollar was $8.40.

The U.S. dollar's earlier rise caused a couple of spills, but so far there hasn't been any panic move out of gold. That bodes well for the metal, even if there are further declines today.


Update 2: The worst ended up passing late this morning as the gold market settled down. The rest of the afternoon saw the metal drift in a range around $1,132. There was a driftdown between 1:00 and 2:00 PM ET, which was partially reversed in the next hour. It resumed, although at a much slighter rate, until just before 5 PM when the metal jumped up to close at $1,132.50 for a loss of $7.10 on the day. This loss was the first in six trading days, and wasn't wholly unexpected. It could be pegged as a breather, despite the magnitude and (in late morning) the suddenness of the drop. The Kitco Gold Index had the metal down $7.40 due to U.S. dollar strength and up 30 cents due to predominant buying. Ex-dollar, gold did fine today.

The U.S. Dollar Index made for quite the comeback story. The strong morning rally, interrupted by a dip, climaxed just before noon. A second attempt, starting just before 1:30, dragged the Index up to 80.664 before it gave up its gains from that last attempt. The rest of the day, from about 3:30 PM to the end, saw the Index in a trading range bordered by 80.55 on the upside and 80.5 on the downside. So, the U.S. dollar wound up keeping most of its recovery gains.

The six-month daily chart, from Stockcharts.com, shows the extent of the recovery rally today:



I have to admit that the extent of it took me by surprise. Rather than a being a mere relief rally, this one almost took the Index up to the trading range it was at before yesterday's plummet. The high of the day was well within that zone, even if the most recent candlestick looks like the old 80.5 floor is now the ceiling. The RSI line at the top of the chart ended up bottoming at the point at where it would be expected to if the Index was still in a bull run. So, my remarks yesterday about the spill may have been premature, or wrong. The next few trading days' worth of action will tell. For now, I'll note that no technical indicator except for the MACD lines at the bottom say that the Index is headed for a downtrend, and that one is iffy in bull runs.

The greenback will have some influence on the gold price, expressed as it is in U.S. dollars. The daily chart of gold, also from Stockcharts.com, shows today's decline as a mere pullback:



The most recent day's action found support near what used to be the resistance level of $1,125. So, to all appearances, the near-term uptrend is still intact. The U.S. dollar's drop is what put gold over the top of that resistance line; a resumption of its uptrend would likely drive gold back down, making for another busted bullish chart pattern for the metal. (The first got busted on January 12th.) To my eyes, it looks like the U.S. Dollar Index's rally is largely spent, and gold continues to do well in other currencies. So, even if the greenback recovers, it's unlikely to be a disaster for gold.

A Bloomberg report, webbed by Business Week, ascribed the fall in gold to a large drop in the Euro; that drop was attributed to continued easy-money policy by the European Central Bank. [This explanation does gibe with the recent record-high price of gold in Euro terms.] An expert who's firmly bullish on the greenback is quoted:

“The dollar is only going to get stronger and stronger,” said Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois. “Everybody is beginning to realize that the ECB is cooked because the Greek problem is not going to go away. Investors will go back to the dollar, and gold goes lower.”

An article from the Wall Street Journal Online points to domestic turmoil in Greece as a reason to believe the fiscal troubles for that country's government are not over. Good performance in Euro terms is noted, but technical-selling factors are also brought in:

[Broker and futures analyst Frank] Lesh said there might have been some selling to take profits on short-term positions when April gold was not able to extend above Wednesday's seven-week high of $1,145.80. "But they're ready to buy back in when the time is right, too," he added.

Others said some technical selling may have occurred on the slide through $1,131.50 to $1,130, which several observers had cited as chart support since the market broke above this earlier in the week.

Lesh put support for April gold around the session low, which was $1,125.90, then $1,119. He pegged resistance around $1,150, $1,153 and $1,158.

Also mentioned is a new trading trend: betting on risk appetite in several commodities, including gold and oil, with trades placed inverse to the dollar. Of course, those trades for gold are not always decisive.

All in all, there's less reason to be confident in gold than yesterday or the day before. Declines happen, though, and today's ended a good run for the metal. The techncial position is still bullish near-term, and there is ex-dollar buying power still creeping in. Higher prices means one of the main props is gone from the gold market, but bargain-hunting may again kick in if the decline continues. There's reason for gold bulls to worry, but not much reason for fear.