Gold Pauses, Then Refreshes

Gold spent most of last night in a narrow trading range, bordered by $1,117 and $1,118. During most of that time, the price was bumping up against the latter level. However, when the break came just after 11 PM ET, it was to the downside; by midnight ET, the price was well below $1,116.

The drop led way to a wider trading range, with $1,116 serving as a porous floor. A break above the $1,118 level just before 3 AM prefaced some fluctuation between the $1,117 level and $1,120, but the rise didn't last; by 4 AM, gold was back in the range established at midnight.

That break, though, foreshadowed a more durable rally starting at 5:30. In about seventy-five minutes, the metal was well over $1,121.50. A second run at the $1,122 level crested at $1,123.50, but failed to hold until just before 8 AM. As of 8:07 AM ET, spot gold had vaulted up to $1,123.80 for a gain of $5.80 on the day. The Kitco Gold Index had all of that gain attributed to predominant buying.

On the greenback side, the source I normally use has drawn a blank for the entire evening and early-morning period, from 7 PM to 8 AM. An alternate source has the greenback entering in to a rally that lasted until just after 4 AM, topping out at 81.292. Since this rally was not reflected in the gold price moving down appreciably, I'd have to say that the rally is counter-intuitive. It faded into a quick decline that bottomed just before 8 AM at 80.638; an upwards pullback ensued. As of 8:18 AM ET, the Index was at 80.7476.

However, couterintuitive, the greenback rally was real. The paradox is resolved in this Wall Street Journal Online report:

Spot-gold prices are nearly unchanged Tuesday despite a stronger dollar, helped by recent interest in euro and sterling trading.

Euro zone debt concerns and worries about a possible minority government in the U.K. are driving investors to hard assets, supporting the precious metal in currencies other than the dollar.

Later in the report, Dennis Gartman is quoted as noting that gold is considerably stronger in terms of the Euro. The others quoted sound skeptical about the possibility of further appreciation, in U.S. dollar terms at least.

The point that Gartman made is echoed in a Reuters report, which presents the strength in the greenback as capping gold gains.

Sterling-denominated gold also rose above 750 pounds an ounce, near Monday's record high at 753.69 pounds an ounce, meanwhile, as the British currency was driven lower by fears that the next UK general election could result in a hung parliament.

"For gold, all the action is in non-U.S. dollar currencies," said Commerzbank in a note. "Given that the U.S. dollar has recently gained in strength, gold expressed in U.S. dollars is also holding up astonishingly well."

However, scrap sales in Asia are increasing and Indian buyers' interest has waned, so the strength may not continue. That underlying strength is noted earlier in the article:

"The dollar has tested recent highs against the euro... but that is not dragging gold down, so obviously there is an underlying strength in gold at these prices," said Saxo Bank senior manager Ole Hansen.

"With the uncertainties going on at the moment, apart from the currency relationship, there hasn't been any particular reason for selling it."

Also noted is the fact that the SPDR Gold Trust's holdings were unchanged yesterday. Given that fact and the waning of physical demand, as well as the calling-forth of physical supply, it's not surprising to see skepticism about the current try for $1,125-30 from traders.

The counter-intuitiveness of gold's performance given the U.S. dollar rally is seen in this Bloomberg report. Originally titled "Gold May Decline In London As Stronger Dollar Reduces Demand", it's now entitled "Gold May Gain in London as Alternative Investment to Currencies."

There is a lag effect evident from the Eurocrisis, which the article touches upon.

“The status of gold is very clear; it’s security against any financial turmoil in any country,” said Wallace Ng, Hong Kong-based executive director of commodity derivatives at Fortis Nederland. “People are worried about national debt of the European countries, that’s why they sell euro and sell sterling, but if they are worried about the situation, they shouldn’t sell gold.”

As regular trading got rolling, gold has been fluctuating in another narrow trading range - but one that's considerably higher than last night's. Although raggedly, the range is bordered by $1,123 and $1,125. As of 8:45 AM ET, spot gold was at $1,123.20 for a gain of $5.20 on the day. The Kitco Gold Index has $4.00 of the gain attributed to predominent buying and $1.20 to a weaening U.S. dollar. The greenback has weakened, as reflected in the U.S. Dollar Index slumping to 80.5667 as of 8:50 AM ET before recovering to 80.6245 as of 9:00. The Index had bumped along 80.7, which served as a floor, before breaking through it as of 8:37. In three minutes, 20 basis points were sliced off it.

All in all, things are looking up for the metal. There's still, though, the matter of the difficult-to-crack resistance level just above present levels...