Gold Gets Slammed Down

Perhaps the predominance of buying in recent days built up into an air pocket. Perhaps it was hesitation in the gold market itself. Whatever the reason, one of those slamdowns hit gold this morning. There was no major rebound in the U.S. dollar to explain it, nor any news item of note that would affect gold. The stock market hasn't plummeted, suggesting that a decline in the oft-cited risk appetite wasn't the reason. Perhaps the slamdown was overdue.

Prior to 9:40 AM ET, gold muddled along a trading range bordered by $1,133 and $1,136. Then, until about 10:05, gold shed about twelve dollars an ounce. Subsequent to that decline, a small relief rally turned into a declining channel that has kept gold below the $1,125 support level. In its later stage, at about 11:30 AM, gold hit its daily low of $1,117.70. The metal may rally above that level, but there's no sign of that now. As of 11:36 AM ET, spot gold was at $1,121.40 for a loss of $13.00 since Friday's close. The Kitco Gold Index has $12.30 of the drop due to predominant selling and only $0.70 due to U.S. dollar strength.

The U.S. Dollar Index has rallied after breaking support at 80.25. After descending to 80.15 as of 9:33, it began ascending at a nice two-stage clip ebfore stalling a little. As of 11:49 AM, it was at 80.49.

There's some difference of opinion regarding the drop, but this Bloomberg article webbed by Business Week attributes it to the recent rise in the euro, making gold relatively unattractive as the Eurocrisis fades.

“If the Greek situation calms down, people may not be as interested in owning hard assets,” said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago. “Gold is losing its momentum.”

It could be that gold went too far, too fast in Euro terms and was due for a reaction.

Whatever the reason, the plummet's put a crimp in the current gold-market recovery. The rest of the day will reveal if there's more coming.


Update: The day's low of $1,117.70 actually came at 11:30 AM ET; that low looked like a final wipeout. Since then, gold has ascended in a rising channel, which came to a halt at the $1,025 level. As of 1:36 PM ET, spot gold was at $1,023.30 for a drop of $10.80 since Friday's close. The Kitco Gold Index apportioned the loss into $1,040 due to predominat selling and $0.40 due to U.S. dollar strengthening.

Part of the reason for the recovery was a small decline in the U.S. Dollar Index. After reaching 80.53 at about 12:03 PM, the Index sunk back to the 80.4 level before drifting upwards again. As of 1:41 PM, it was at 80.44.

So far, it looks like the day's damage has been done - even if the $1,125-$1,130 level is providing resistance instead of offering support. The danger of a futher rout, though, seems to have passed.


Update 2: Thing were quiet, relatively, for the rest of the day. Gold spent the afternoon in a trading range bordered by $1,120 and $1,125.

The price tried to poke above that ceiling twice in the early afternoon, but both efforts came to naught. From 1:30 PM ET to 3:15, the metal was in a much narrower range, $1,122-$1,124; it broke through on the downside, and spent some time between $1,120 and $1,122 before climbing back up. As of the close, spot gold was at $1,123.70 for a loss of $10.70 on the day. The Kitco Gold Index divvied up the loss into $10.50 due to predominant selling and $0.20 due to U.S. dollar strengthening.

The U.S. Dollar Index was quite quiet for the rest of the afternoon, which it spent bobbing in a trading range between 80.4 and 80.45. At the close, it was at 80.44.

Its daily chart, from Stockcharts.com, shows that th entire day's action was fairly quiet too:



Of note is the fact that 80.5 is now serving as a resistance level. That was the case in mid-February, before the Eurocrisis erupted. Now that Greece seems to be pulling out of its morass, the greenback has gone to about where it was. The Index has basically gone nowhere in a month.

That's unusual given the volatility it's experienced since the financial crisis erupted. The last period of stand-pattedness, which lasted for several months, came at a turning point. The dollar hit its multi-year low in early-mid March of 2008, and from that point remained in a trading range until it took off at the beginning of August. Between March and July, it did rally somewhat but the rally was laboured and intermittent.

That period was not like this one is. First of all, the band has been narrower this past month. Secondly, the Index already rallied at a fair clip. Thirdly, the catalyst that sent the Index shooting upwards was a financial crisis; this time 'round, a crisis that should have benefitted the greenback (and did) hasn't all that much effect all told. The Index seems stuck.

I can't see any catalyst that would push it either way as of now. A more serious crisis involving Portugal or Spain would push it upwards, but there's no warning sign of any such malignancy in the Eurozone - just the deficit-to-GDP figures for those two countries. The Eurozone authorities won't be caught napping the next time 'round. Another catalyst upwards, counterintuitive as it may be, would be continued recovery in the United States if said recovery increases foreign confidence in U.S. securities to the extent that demand for the greenback rises with it. Of course, resumed prosperity could push the greenback down because of a surge in imports. Other than that possibility, I can't think of any reason why the Index would be pushed down. As with Spain and Portugal, the deficit elephant in the U.S.'s room is just standing there.

The chart for gold captures the decline for the day, but puts it in perspective:



Since a month ago, gold's traced out two higher highs and one higher low. Desite today's dsappointing drop, the chart shows gold still on track towards making another higher low. Indian buying isn't a deus ex machina, any more than Chinese buying or even central-bank buying is, but today's price will trip the bargain switch in Indian markets becaus of the strengthened rupee. As a matter of theoretical neatness, a closing bottom at $1,120 would show a still-intact short-term uptrend. Today's low was a few dollars below that, but the close wasn't.

It was disappointing to see how much gold was swacked by relief that the Eurocrisis has passed for now, but that reaction is the flipside of crisis buying. Gold trades are beng unwound for the same reason that U.S. dollar-long trades are.

A Reuters report webbed by the Globe and Mail chalked the decline up to "technical selling and liquidation by investors of positions added last week to cushion currency volatility from the Greek debt crisis." The technical part pertains to gold's failure to hold the fort at $1,130.

“There is profit-taking after the sharp increase over the past few weeks in gold, and a bit of unwinding of the excessive fear trade linked to Greece and Europe,” said Zachary Oxman, managing director at California-based TrendMax Futures....

“It ran out of steam on currencies, and in a thin market with bullish comments about growth around, gold is feeling a bit heavy,” said Simon Weeks, head of precious metals at the Bank of Nova Scotia.

In other words, gold got ahead of itself. People got too bullish too soon, a picture confirmed by a rise in speculative long futures positions last week.

Also mentioned in the article is a fact that's been lost in the crisis watch: yields are higher in Euro-denominated debt than in U.S. dollar debt of similar quality. That's putting a bit of pressure on the greenback to the benefit of the Euro.

It would be a little reckless of me to say that the decline will halt tomorrow, but there's at least one reservoir of demand that will soften any continuation of the decline. Indian buying may not swing the gate, but it will have an influence. The U.S. dollar is no longer on the tear that it was despite a crisis that should have put it on one, and would have had we been in '08. Perhaps the greenback safety trade is becoming stale.

Other than a surprise announcement from the People's Bank of China ratcheting up its tightening by more than what the gold market's become inured to, or an unlikely surprise rate hike by the Federal Reserve, I can't think of any driver that would push gold down a lot. The unwinding of the gold-Euro safety trade has to end sometime; it may have already ended. Gold may still fall, but the near-term bull trend that's lasted a month hasn't been impugned.

Of course, the above doesn't mean that gold's going to challenge $1,160 anytime soon...