Gold Breaks Above $1,130, Stays Up

When the U.S. Dollar Index rallied to above 81.25 early this morning, the gold market shrugged it off. That resilence proved to be the cue for a strong gold rally that has pushed the metal above the widely-watched $1,125-$1,130 resistance level. Not by much, but the zone has been surmounted.

When regular trading opened, the metal spent some time vaccilating before heading down somewhat. By 9:10 AM ET, the spot price was hovering at just below $1,121.

The subsequent rally began slowly, but it picked up as the morning went on; by 9:55, gold was above $1,128. A pullback to $1,124 proved to be preparation for a stronger rally that took the metal all the way up above $1,132. An upwards test just before 11 AM poked the metal up to $1,133.90 before the uptrend turned into a holding pattern between $1,130 and $1,132. As of just before 11:15, the rally resumed; it pushed gold up to $1,136.00 before pausing yet again. As of 11:52 AM ET, spot gold was at $1,134.10 for a solid gain of $16.10 on the day. The Kitco Gold Index had U.S. dollar strength actually subtracting 40 cents off the price, with a $16.50 gain being attributed to predominant buying.

Movement of the greenback seems irrelevant now, 'tis true, especially since it's been trendless this morning. After gliding up to almost 80.9 by 10:35 AM, subsequent to a dip from the 80.7 level to below 80.6 earlier this morning, the Index drifted downwards to 80.64 by 10:55 AM. A quick pull-up to 80.865 by 11:05 wasn't followed through upon, and the Index drifted downwards. As of 11:48 AM ET, it was at 80.72.

The decoupling of gold from the U.S. dollar early this morning proved to be the spark for a nice rally, capitalizing on the tinder had been laid in the last week. It may not continue this afternoon, but an important milestone was surmounted today.


Update: There was a pause, but the rally kept on rolling. Just after 12:10 PM ET, gold crested at above $1,135 and dropped in the next five minutes to $1,132. It hung around just above that level until a little before 1:00, at which point it rallied again. A touch of $1,138 led to a slight back-off to $1,136 and a later surmounting of the old daily high to $1,139.00 even. Since that point, at around 1:20, the metal has basically gone nowhere. As of 1:43 PM ET, spot gold's at $1,137.20 for a gain of $19.20 on the day. The Kitco Gold Index partitioned the gain into $15.50 due to predominant buying and $3.70 due to U.S. dollar weakness. The predominant-buying category has been relatively stable throughout the day.

The greenback is having an effect once again - because of its slumping. Since the time of the last update, the U.S. Dollar Index has fallen from its old perch around 80.7 to below 80.5. The decline actualy started a little after 10 AM, when the Index was close to 80.9. Despite a couple of pullbacks, it got down all the way to 80.42 before pulling up somewhat. That bottom was hit around 1:15 or so. Since then, the Index pulled up to almost 80.5 before falling again; the latest dip started at 1:40, and carried it down below 80.4. As of 1:55, the Index was at 80.3856.

Gold would have gone up anyways had the greenback stayed strong, but the weakness has added some push to the gain. The rest of afternoon trading will show if gold can hold on, or extend the day's gains some more.


Update 2: As it turned out, the 1:15 PM ET top was the high for the day. $1,130 held, though, making this day an important one. The irresolution and stuckedness of gold in recent days has resolved itself to the upside; the $1,125-30 zone has been durably broken above.

After 1:15, gold drifted downwards before coming to rest in a trading range bordered by $1,134 and $1,136. It stayed in that range from 2:15 to almost 3:25, at which point it broke through to the downside. Stopping at $1,132 as of just after 3:30, gold bobbed up and made a double bottom at that level. Subsequently, it climbed back to that same range just after 4:00 and drifted sideways for the rest of the session. As of the close of regular trading, spot gold was at $1,134.50 for a gain of $16.50 on the day. The gain was apportioned by the Kitco Gold Index (KGX) into $3.00 due to the U.S. dollar weakening and $13.50 due to predominant buying.

Speaking of the KGX, it made a record closing high today. The last high was just above 910 as of December 2nd; today's close was at 913.05. What this means is: had the U.S. dollar stayed where it was as of December 2nd, gold would be at a new record price. As it is, the metal's about ninety dollars below the record set on that December day. The gold market smells inflation a'comin', globally, and there's an argument (based on recent action in the face of disappointing news) that the metal would shake off even a Fed Funds rate hike. An inflationary psychology is slowly emerging, although it acts as little more than a buffer to drops.

A Fed Funds hike, though, is not in the cards as yet: the window to watch is the end of next week, about the time when the People's Bank of China would make an announcment of any policy change. Given that the mainland economy is still roaring, and property values are still skyrocketing, an announcement of another reserve increase and/or a rate hike is likely. How the gold market takes it will be a needed sampling of sentiment. The last one didn't have that much of an effect, but the reserve-ratio hike on January 12th derailed a recovery that had gold up above $1,150. Of course, the U.S. Dollar Index was much lower then.

Speaking of the greenback, the Index did little for the rest of the afternoon: it drifted around 80.5 with no discernible trend except sideways, although it did dip a little near the end of the day. At the end, it was at the 80.47 level.

The daily chart for the Index looks odd, with another record high failing to take hold:



Ragged it is, more ragged on the upside it becomes, but the Index is still in a trading range. The resistance at 81 is porous but solid: every time the greenback's mounted a rally that's carried the Index above 81, no matter how well above that level, the rally's evaporated. Eurocrisis-related hopes are not bearing fruit now; the safe-haven money is shifting towards gold. Although the overall techncial picture is still bullish, the headwinds make this rally a different breed from the last crisis-related ones in '08-'09. It's running out of steam. Although there's no reason to expect one, the "big disappointment" would come on the downside. Had the Index been a stock, I'd be wondering if it were in a short-term distribution phase, where a jump in demand calls forth a rush of new supply instead of moving the price up.

The chart for gold is not only a better one near-term but also has some features that rate calling special attention to. I've put two notes in the same color as the lines I drew on this chart, like the last from Stockcharts.com. The scribbles pertain to two bullish technical signs: a positive divergence in the Relative Strength Index (RSI) and the completion of a reverse head-and-shoulders:



The first line, in aquamarine, shows that the RSI line on the top is slightly higher even though the price of gold itself is lower. That divergence is a sign of strengthening.

The second, in brown, is a pattern that I've been harping on in recent days. As of today, the neckline (the brown line) was broken, making the reversal pattern complete. A purist would say, "watch out for $1,150." I'm not one, but the RSI indicator and that head-and-shoulders formation do give an important clue to market internals and behavior. Today's rise looks sustainable, although I cannot rule out it becoming belaboured. When put together with the recent reaction to the Eurocrisis and the trouble for the pound, a sunny picture for the metal emerges.

A Reuters article, webbed by the New York Times, points to a milestone: record high prices in both the Euro and the pound.

Gold hit record highs in euro and sterling terms on Tuesday as the precious metal benefited from volatility in the currency markets, with spot gold prices extending earlier gains.

Investors are increasingly diverting fresh investment into gold as a hedge against currency market instability.

The current trouble dogging the U.K., and the pound, is the possibility of a minority government and hung Parliament in the face of a record fiscal deficit; that outcome would presumably block any needed austerity measures from getting through. An interesting difference between the U.K. and the U.S.: in the latter country, gridlocked government tends to restrain spending and ease deficits. Such was the case from 1995 to 2001.

A Marketwatch article says that the added allure of gold has had a kicker in the form of diminished allure for the greenback. The Euro is beginning to recover, as it looks like the Grecian government is taking the need for austerity seriously. That's the main reason behind the false bullish starts the greenback's been experiencing lately.

All in all, it's been a day where some recent question marks surrounding gold are fading, and new ones are besetting the U.S. dollar. I should be something of a wet blanket right now, but I don't have any good reason to. Sentiment for gold is improving, but there aren't any extremes; nor is there any excitement in the gold market I can perceive.

This day has had its milestones, with records being set not only in Euro and pound terms but also in the Kitco Gold Index. In U.S. dollar terms, although far from a new record, the metal has surmounted an important and closely-watched resistance level. For the nonce, anyway, gold is back.