Gold Drops Below $1,105

The big political story of the weekend was the ram-though of Obamacare (unless it's now PelosiCare), and the long-term implications are already being digested. In the short term, its passage had little effect on gold.

The metal spent some time below $1,105, but recovered to stay in the $1,105-$1,110 range until early this morning. For most of the overnight session, gold drifted. Starting at 5:45, though, the price broke through $1,105 and stayed below; a recovery rally only brought it back up to that level. Another dip at about 7:40 brought the price down further, to $1,101, before another relief rally set in, but the decline continued right down to $1,100 before rebounding a little. As of 7:56 AM ET, spot gold was at $1101.60 for a drop of $6.30 on the day. The Kitco Gold Index divided the loss into -$4.30 for predominant selling and -$2.00 for a strengthening greenback. Yes, the latter went up overnight.

To be more precise: the U.S. Dollar Index spent the night rising, in upward waves. Peaking at 80.96 as of 3:15 AM, it went for a tumble that took it down to 80.7 as of 5:00. That decline proved only to be an interruption of the upward trend, which resumed and pulled the Index almost to 80.95 by 8:00. As of 8:09, it was at 80.90.

Gold's declines were explained by the rising greenback in a Wall Street Journal article, which attributes the latter to continued fears that there won't be an EU aid package for the Grecian government. The early-December peak being anchored in gold buyers' minds, $1,100 seems a bargain:

Analysts said physical demand continues to underpin gold, as prices seem cheap relative to December's record high of $1,226.30 an ounce.

"We continue to see good physical interest at these levels," said Walter de Wet, a precious-metals analyst at Standard Bank in London.

Although gold will continue to be weighed down by U.S. dollar strength, physical demand should help provide a floor around the $1,087-$1,090 level according to two other analysts.

A Reuters article attributed gold's range-bound behavior to conflicting impulses: selling pressure from the above-mentioned greenback rally and buying power from safe-haven demand. Also mentioned is India's unexpected 25 basis point rate hike on Friday, which also added to selling pressure. But, the main event is still the Eurocrisis:

European leaders sent out conflicting signals at the weekend over aid to Greece, with Germany's Angela Merkel urging Athens to solve its debt problems alone and Italy's Silvio Berlusconi strongly backing EU support.

"There is still plenty of confusion about a bail-out for Greece," said Credit Agricole in a note. "Merkel dampened expectations of a bailout by stating that it was not even on the agenda for the summit."

"In contrast, EU President Barroso has pushed EU members to agree on an explicit stand-by aid agreement for Greece as soon as possible."

"All of this suggests more downside for EUR/USD,...

Oil is mentioned too, near the end of the article; crude's dropped to $80 per barrel. That drop may have weighed down gold too.

A Bloomberg article, as webbed by Business Week, attributes Friday's drop to greenback strength "after the Reserve Bank of India unexpectedly raised borrowing costs."

“Greek debt concerns continue to keep the euro in a weak mood,” James Moore, an analyst at TheBullionDesk.com in London, said in a report. The rate hike by India has also “dented risk appetite,” he said.

It also mentions that holding of the SPDR Gold Trust remained unchanged on Friday - despite the plummet that same day. Of course, there's no guarantee that today's won't change.

The opening of regular trading drained a relief rally that carried gold up to $1,105 by 8:15. As of 8:53 AM, spot gold was at $1,102.40 for a loss of $5.50. The Kitco Gold Index had $2.30' worth of loss pegged to predominant selling and $3.20' worth of loss to U.S. dollar strength. The U.S. Dollar Index has strengthened in the interim; as of 8:55 AM ET, it was at 81.01.

Gold's decline may be continuing, but $1,100 has not been breached. It's now at same level as Friday before last. The course of the day's trading will show how much decline is left in the gold market.