Gold Pushed Down By Wholesale-Inventory Report, Unexplained Plummet

Despite U.S. business sales having gone up for the tenth straight month, wholesale inventories still shrunk. The sales figure for January was a 1.3% annualized gain, while inventories dropped 0.2%. The picture given by both suggests continued caution, which doesn't bode well for the unemployment numbers.

At the time of the release, gold was being knocked down; the decline ended just after 10:05 at $1,119. Prior to that release, which was handicapped by the gold market, the metal was already drifting down quietly in three downward humps. Subsequent to the last drop, gold was marking time at the $1,121 level. As of 10:42 AM ET, gold's gain was miniscule after evaporating entirely. The spot price was at $1122.90 for a gain of $0.70 on the day. The Kitco Gold Index assigned +$0.10 to predominant buying and +$0.60 to a weakening greenback.

Yes, the U.S. Dollar Index declined too after rallying all that way to 80.68. The top was reached at 8:40; since then, the dollar has descended in a raggedy pattern to just above 80.5 before recovering a little. As of 10:44 AM ET, the Index was at 80.54.

So far, the recovery has turned into a slog. Gold's performance could have been worse, but it could have been better too. There's a chance that today's action will be largely directionless.


Update: I have to admit to eating a little crow on that one. Out of nowhere, and after a rally got the metal up to above $1,127, gold was poleaxed starting at 11:05. This plummet wasn't sudden - it lasted for more than an hour before abating - but it was steep. At its end, as of 12:15 PM ET, about twenty-five dollars had been knocked off the price. The bottom came in at $1,102.10.

Since then, gold's snapped up a little and has been trading in a much lower range bordered by $1,105 on the downside and $1,110 on the upside. It remains to be seen whether gold can recover from this plummet by tomorrow, but the recent bullish reversal pattern now looks like it's become the third fake-out. As of 1:05 PM ET, spot gold was at $1,108.60 for a loss of $13.60. Kitco's Gold Index attributed $15.00's worth of loss to predominant selling; had there been none, there would have been a gain of $1.40 due to U.S. dollar weakening.

No, the greenback did not cause the rout. The U.S. Dollar Index sunk after that rally mentioned in the original post, which filed to get as high as the last one. A fairly quick decline in the Index took it down to 80.308 by 11 AM; that decline established 80.5 once again as a resistance level. A three-step rally couldn't get above it. As of 1:31 PM ET, the Index was making another run at 80.5; it was at exactly 80.50.

Returning to gold, this Wall Street Journal report has this to say about what did cause the plummet:

Analysts cited a variety of possible catalysts for the initial decline, rather than a single smoking gun. This included a reversal in several outside markets [such as crude oil], continued reaction to comments from a Chinese official Tuesday suggesting that the country's future gold purchases might be limited, plus rising Treasury yields.

The head of one precious-metals trading desk characterized gold's sell-off as "excessive" as the sell stops were hit, with many participants selling to exit positions in which they previously bought.

In other words, this decline was more "natural" than some others during interday trading. Gold hit an air pocket.

The question now is, will gold recover during the rest of the afternoon? It seems unlikely as of now, but gold is in a bargain range. I note in passing that stop-loss protection can be considered as weakening the hand that holds the investment.


Update 2: The rest of the afternoon was quiet; the losses earlier in the day were not recovered.
Instead, gold spent the rest of the day in the same trading range mentioned above: between $1,105 and $1,110. There was an attempt to break through on the upside as of 2:15 PM ET; for the next forty-five minutes, $1,110 became a support level. However, gold fell through and resumed the same old trading range. As of the close of regular trading, spot gold was at $1,108.20 for a drop of $14.00 on the day. According to the Kitco Gold Index, gold would have dropped $16.20 ex-greenback due to predominant selling. U.S. dollar weakness added $2.00 to the price.

The greenback did wind up declining over the rest of the day. After an attempt to get above 80.5, the Index fell back to below 80.4 in a quick decline that ended at 2:20 PM. It rallied to just above 80.5 again, but the rally didn't last. Instead, the Index descended yet again to below the 80.4 level and slowly sloped downwards after recovering to 80.435. As of the end of regular trading, it was at 80.41.

The daily chart, from Stockcharts.com, shows that the greenback is stuck, with a decline in volatility that's unusual:



The narrow trading range the Index is in is still in recovery-rally territory, from the time when it dropped to just below 80. The other shoe, if there is one, has taken some time to drop. It may not, as the greenback is still in bullish mode technically speaking.

The relative quiescence of the dollar-index market was not matched by gold, to say the least.



The day's drop marks the second reverse head-and-shoulders pattern that has come to naught. I'm beginning to wonder if technical analysts are considered the gullible sheep in the commodity pits. Yesterday, it looked as if the declines had abated; today's action indicated otherwise. I should amplify a point I made offhand above: traders who trade with stop-loss orders are weak hands, in the common use of the term. There seems to be a lot of stop-loss use in the gold market by longs; they do add to short-term volatility on the downside.

I mention this because it ties in with the business-media explanation of what went on today. There was no single event that triggered it, and the hitting of stop-loss orders did amplify the decline. Tragically, the proliferation of stops has made for a more treacherous market. There was no shorters' spree that explains the extent of the decline.

This Reuters report, as webbed by the Globe and Mail, describes the catalyst as profit-taking and/or longs liquidating:

After rising almost $20 last week, gold has already dropped by $27 this week as traders take profits. Speculators had been increasing their net long position in gold for four straight weeks but they may now be trimming those positions, putting selling pressure on the yellow metal, traders said....

“We saw some liquidation on futures again, with more than 1 million ounces being sold,” said Christophe Jacot, vice-president of FX and precious metals at EFG Bank.

The article does hint that the liquidation might have been prompted by better news coming out of Greece, which would encourage short-term traders betting on crisis to cash out. The greenback has been pulled down a little by the resultant recovery in the Euro. However, no such liquidation event was evident in the U.S. dollar market unless the liquidation trend hit negative feedback instead of inducing positive feedback. Perhaps close stops are less used in the greenback markets; perhaps there are more bulls there.

To sum up, it was a day that was both surprising and bad for the gold market. The "market god" administered a harsh lesson today, which few will like. However, gold's now in bargain range and investment demand may come in at these levels. Tomorrow may be a day when gold licks its wounds.