Gold Pushes Up, This Time Due To Greenback Weakness

There's a case to be made that gold, in part, anticipated a drop in the U.S. dollar yesterday. That drop is what we're seeing today, as resolution to the Eurocrisis becomes visible.

From a dip as of just before 9 AM ET, the U.S. Dollar Index settled into a trading range until 9:45. That range was bordered by 80.26 on the downside and 80.32 on the upside. After falling beneath it, and holding near the 80.25 level, the Index rose on the unexpectedly strong ISM report to just above 80.36. From there, after making a double top at 10:12, it was downhill.

Falling sometimes quickly, sometimes slowly, the Index breached the 80 level on the downside and slid all the way down to 79.8123 in late-morning trading. As of 11:56 AM ET, the Index was at 79.8464.

Gold reponded to the drop, but not by all that much. After regular trading opened, a rise to $1,142 turned into a two-stage drop to $1,136 that ended just after 9:30. A spike up to $1,140 was erased, leaving the metal at below $1,136 by 10:10. Then, the price slowly and hesitently climbed up until 10:30, at which it was at $1,137. Then, prompted by the fall in the greenback, gold shot up to $1,141 in less than ten minutes. A period of indecision between $1,139.50 and $1,141 was ended at 11:10 AM with another jump that took the metal up to $1,145.20. That jump eroded somewhat before rolling again as of just before noon. As of 12:02 PM ET, spot gold was at $1,144.20 for a gain of $7.70 on the day. The Kitco-Gold-index-attributed premium due to predominant buying has lessened to $0.70. The gain put to the falling greenback was $9.00.

Despite the continuation of the rise, gold has shown some softening today. Had it not been for the U.S. dollar dropping, today would not have been a good day for the metal. The ex-dollar slowdown isn't that unexpected, as the roll gold's been on had to end sometime.

This afternoon's trading will evidently be determined by the way the greenback goes. Should the 80 level remain breached, gold should put in a good showing.


Update: After that rise above $1,144, which peaked at $1,146.20, gold settled down. The peak turned into a spike, with price dropping to the $1,142.50 level and staying between there and $1,143 until just before 12:50 PM ET. A dip to $1,141 followed, which led to a little churning before the price pulled up to $1,144. That rise didn't last, as the metal pulled back down to about $1,142. As of 1:42 PM ET, spot gold was at $1,142.70 for a gain of $8.20. Kitco's Gold Index posted an $8.50 rise due to greenback weakness and a drop of $0.30 due to predominant selling.
The U.S. Dollar Index recovered a little from its morning drop, but failed to climb above 80. After 11:45 AM's bottom as 79.8123, a rolling trading range developed which took the Index up above 79.88 at its peak before the roll turned downwards. The roll turned into a slide by 12:30; the slide ended with a bottom being made at 12:36 that was slightly above 11:45's. The next eighteen minutes saw the closest thing the greenback had to a relief rally so far, with the Index rising to 79.921 as of 12:54. A pullback from there brought the Index down to a trading range between 79.86 and 79.905, where it was still was as of the time of this update. As of 1:56 PM, the Index hit 90.8990.

Gold has held on to the bulk of its gains, just as the U.S. Dollar index has kept the bulk of its losses, but the absence of any predominant buying ex-dollar indicates post-surge tiredness. The rest of the afternoon should be relatively quiet for gold, as has the first part, but the metal may be dragged down by a further relief rally in the greenback.


Update 2: There was a relief rally, but not much of one. Gold was dragged down, but only to the $1,140 level. At the end of the trading day, an important hole has been poked in the U.S. dollar run.

The downturn started just before 2:00 PM ET, and decelerated until gold ended up in a trading range. By 3:30, the metal was fluctuating between $1,139 and $1,140.50; it stayed in that range until the session ended. At that end, spot gold was at $1,139.60 for a gain of $5.10 on the day. The ex-dollar component of the Kitco Gold Index (KGX) continued to deteriorate: by the end of regular trading, it was down to -$1.90. The weakening-greenback component was at +$7.00.

Despite that deterioration, the KGX did close at a record yesterday, as this six-month chart of it clearly shows:

That closing coincided with record highs in both the pound and the euro.

Turning to the spoiler of the raw gold price in recent months, the U.S. dollar was clearly hit today. The record shorts of the euro-dollar trade must be sweating, if not pulling out. The euro-dollar chart at this website shows a turn that looks like the beginning of a serious pull-up, although not likely a full-scale reversal.

Moving to the action in the U.S. Dollar Index for the rest of the afternoon, a relief rally did enter into the picture that pulled the Index up to 80. After fluctuating in a tight range from 1:00 to about 2:30, the Index pulled up to about 79.95. There it stayed around until a try at 80 between 3:43 and 4 PM; that try pushed the Index to 80.005. After a pullback, it tried again at 4:30 and got up to 80.02 by 4:47. A briefer pullback led to a spike that reached 80.0326 by 4:54. Then came a small downtrend that pulled the Index down to the 79.8 level, slightly below where it closed at as of 5:30: 79.99. Above 80 may yet be durably reached.

However, any such rally would be in the nature of another relief rally. This daily chart, from Stockcharts.com, makes plain what happened today:



The drop on the day was almost large enough to make for an outright gap. The RSI line at the top of the chart has deteriorated almost to the point at which it would turn up in a bull-market run. Back in '08 and '09, the indecisiveness in the chart before today would have been the prelude to a new rally. This time, it wasn't.

It's too early to say that this day marks the introduction to a trend reversal back to bearish, but the extent of the decline after today is going to say a lot.

The daily chart for gold contains a pattern that hasn't been seen since the days when the bull was sprinting: five consecuitve up days on the chart, as shown by the white candlesticks.



Although this run was more laboured than ones back in late '09, it was smoother than the aborted one back in early January. Of interest in the fact that the 50-day moving average, graphed in blue, is beginning to turn upwards. That turning and the fact that the gold price is confortably above it are seen by technicians as bullish.

Five days' worth of gain is impressive, but it's also unlikely. Had the U.S. dollar not helped out by dropping, it would have been four. There isn't much chance for six, as gold is likely to enter a consolidation period; also, the greenback relief rally is likely to extend tomorrow. However, the last five trading days have been more reminiscent of a bull market resumption than a bear-market rally. I don't expect this uptrend to go that far, as gold has a habit of spending a fair bit of time consolidating after making an impressive run like late '09's was. A durable economic recovery will rassle with appearing inflation by draining away some of the safe-haven demand that's already there. Also, there's no discernible resumption of investment in gold ETFs as yet, although physical-gold sales numbers are still rising. The driver for '09's rally isn't here now.

A Marketwatch report shows some optimism returning; it's entitled "Gold nears high of 2010 as dollar falls vs. euro." Quoted therein is Commerzbank analysts who have their eye on $1200 as a possibility:

"Alongside the currently robust jewelry demand from India and the high interest of speculative financial investors, ETF demand could also support the gold price in holding up against the firm U.S. dollar and in advancing toward the $1,200 an ounce mark," said analysts at Commerzbank.

Still, as analysts from TheBullionDesk.com pointed out later in the report, the metal has a bit of a slog ahead if that scenario pans out: resistance is at $1,146 and $1,162. The price bumped up against the former today and did pull back.

As I explained above, the odds say that tomorrow will not be a day for the optimists even if this rally proves to stick over the longer term. Still, the gold situation is much improved from that of a month ago.