Gold Makes A Comeback, Which Fizzles

Thanks largely to predominant buying, as measured by the Kitco Gold Index, gold climbed up above $1,140 in late-morning trading. The fading of the U.S. Dollar recovery had something to do with it as well, but the partial decoupling to the benefit of gold is still in place. One likely cause fopr gold's rally is the trouble over the Grecian austerity package, which isn't going over very well, and related speculation about how much the EU will have to (indirectly) chip in to keep the IMF away.

The announcement of the better-than-expected employment data, with the possible exception of the U6 unemployment rate, kicked up the greenback; that led to a swift decline in gold from $1,134 to $1,128. Speedy it was, but the reversal of the drop was rapid too. That reversal heralded an uneven rally that took the metal all the way up to $1,140 by 10:30 AM. A peak just above that level led to a pullback to $1,138, but it proved to be a pause that prefaced gold going all the way up to $1,141.90 as of 11:15 AM ET. Another pullback followed. As of 11:46, the spot price was $1,137.70 for a gain of $5.20 on the day. Kitco's Gold Index divided the gain up into $4.70 for predominant buying and only $0.50 for a weakening greenback.

The U.S. Dollar Index has weakened since its jump above 80.87 shortly after the unemployment and nonfarm-payroll data were released. Since a partial recovery peaking at 80.775 at 9:15, the Index has sunk in a three-stage decline that took it all the way down to 80.4 by 11:24. Since then, it's recovered to above the 80.5 level before slipping back a little. As of 11:49 AM ET, the Index was at 80.49.

Again, gold has shown resilence in the face of a U.S. dollar headwind, and rally power when the headwind has turned into a tailwind. It remains an open question whether or not gold can make a new daily high come the afternoon.


Update: In the early afternoon, the U.S. Dollar Index has continued to climb up, although unevenly, until reversing starting at 12:30 PM ET. It made for a hump on the daily chart. The Index is quite capable of rising above 80.6, but so far it's less capable at staying up there durably. Still, the upward volatility in the greenback makes for an intimidating sight to anyone daring to short it.

Gold spiking to $1,141.90 proved to be the frontispiece to a decline that took the metal down to below $1,134. The greenback itself proved to be the trigger, but part of the decline was a draining of ex-dollar net demand. Since the dollar pullback, gold has rallied only a few dollars an ounce; the greenback's recovey has drained that pull-up. I have to admit that the air pocket that was deflated earlier today surprised me.

As of 1:40 PM ET, the U.S. Dollar Index was at 80.53, after a partial pullback from the hump, and spot gold was at $1,133.50 for a gain of $1.00. The Kitco Gold Index apportioned this much-smaller gain into $0.20 due to U.S. dollar weakness and $0.80 to predominant buying. The latter category has shrunk considerably since mid-morning.

So far, it's been a disappointing afternoon. The rest of the session, if it's like other Friday afternoons, will likely be quiet. A lot depends upon the greenback.


Update 2: The markets did quiet down as the week ended. Although gold went into another decline, the metal still eked out a gain on the day. A rise in the greenback late in the regular session provided the impetus to the drop.

A more than four-dollar drop took the metal down to below $1,132 by 1:45 PM ET. A relief rally afterwards failed to gain steam, and gold entered a much slower decline which brought it down to about the same price just after 4:00. A dawdle for a half an hour preceded a two dollar an ounce rise, which put the metal just below its closing value as of 4:45. By the close of the week's trading, spot gold was at $1,134.40 for a gain of $1.90 on the day. In contradistinction to this morning, almost none of the end gain was attributed to predominant buying by the Kitco Gold Index. All but 15 cents was attributed to weakness in the U.S. dollar at the time of the close.

At the end of last week, spot gold was at $1,117.90. This week's close of $1,134.90 meant a gain of $17.00, or 1.52%, on the week.

As the session went to its end, the U.S. Dollar Index fell. The hump mentioned above was pulled up from, but only in the form of a smaller hump; the Index went back to 80.5. Soon afterwards, the 80.5 level was broken through on the downside and 80.43 became the center of a new tradig range, bordered by 80.42 and 80.44. The latter was broken through on the upside as of about 3:50, which led to a two-stage rise that took the Index up to 80.476 by 4:12 PM. But, the Index couldn't close above 80.5; by the end of regular trading, it was at 80.47.

The action in recent days on the daily Index chart looks something like the pattern in late December-early January, with the spurt at the beginning and Wednesday's spill beign the chief exception:



The recovery from that spill made the action since February 22 more resemble that between December 23rd and the first week of January. In terms of market internals, there are two other differences between then and now: the Index was much lower then, and the amount of bullishness for the greenback is greater now. As of last Tuesday, the speculative-long component of the Committment of Traders report for the U.S. Dollar Index contract continued to shrink, even though it's at unusually high levels. The COT for the Euro contract, as of the day before the spill, did not reach another record high in the speculative-short category. That category was up only slightly, though. It'll likely have shrunk more in next week's report due to the Wednesday washout. Interestingly, the non-commercial short category expanded a fait bit.

Moving back to the U.S. Dollar Index, the COT levels for speculative longs tended to peak in the middle of a bull run for the last two spec-long peaks. That category's been shrinking for the last five weeks.

My own hunches, or biases, suggest that the Index is going sideways or down. 80.5 is showing the same porousness but solidity that 81 used to show. Part of this feeling of mine is the result of the bullishness that's currently afloat. That bullishness could pan out next week, but it seems a little thick right now.

The daily chart of gold, from Stockcharts.com like the one above, shows today's gain as somewhat piddling given the decline yesterday:



The short-term trend is still up, but the exhaustion seen today makes the blip-up part of the exhaustion after the five up-day sessions last and this week. The graph for this week's Committment of Traders, as of last Tuesday like the ones linked to above, shows an expansion of the speculative-long category. Interestingly, the commercial-long category also expanded; so did the speculative-short category, although from a very small base.

Despite the melting of today's ex-dollar gains, gold is still showing strength in that area. The question is, how long that strength will continue. Gold might well make another stab downwards in the near term due to exhaustion of that demand, but that dip is likely to be ephemeral.

A Reuters report explains gold's rise today as due to "currency worries." Traders are getting interested in ex-dollar strength of the metal:

* Broad commodities gains led by oil, trading at about $82 a barrel, spur gold buying.
* Gold's rise despite a firm dollar suggests that inverse relationship between the greenback and bullion could weaken - Tom Hartmann at Altavest.
* Underlying support seen as SPDR Gold Trust posted inflow for second consecutive day earlier this week.

There's no enthusiasm evident, but there is optimism. This week has been a good one for gold. A bullish chart pattern was completed, and the resultant rally went up to its next resistance level. It's true that gold hasn't been able to build on Wednesday's gain, but that could be chalked up to consolidation. Despite my attack of nerves, I can say that gold's still in uptrend territory. The next week will show if the bullishness continues, and how much if so.