Gold Shoots Up But Is Blocked At The $1,125 Level

Except for the lower base, it's as if last week never happened. A three-dollar rally at 8:30 AM ET proved to be the first of three stages in a leap that took gold up to $1,126. The second stage saw the metal zip up six dollars an ounce right at 9:00. Since the end of the leap, the metal's been fluctuating in a range bordered by that same $1,126 on the upside and $1,122 on the downside. The gain, although currently blocked, has been solid. As of 11:45 AM ET, spot gold was at $1,125.10 for a gain of $16.30 on the day. The Kitco Gold Index apportioned the gain into $10.70 for predominant buying and $5.60 for a weakening greenback.

The U.S. Dollar Index has dropped below 80 in the same timeframe, although not by much. Starting above 80.05 as of 8:30 AM, it slowly drifted downwards until 11 AM, at which point it sunk below 79.8. Since then, it's pulled up a bit. As of 11:47 AM, it was at 79.82.

Since there wasn't a pullback in the Index, gold's rise this morning is primarily due to other factors. As far as I can tell, it seems to be handicapping a steady Fed.

If so, then an impetus for a further rise in the afternoon session isn't likely to be there. Should the Fed stop using "extended period" in this afternoon's policy statement, the ride'll get a little rough.


Update: On the brink of the latest Fed announcement, gold has gone quiet. An attempt to rally above $1,226, as of 12:10, came to naught as the advance turned into a spike. Still, gold hasn't gone down all that much. The bottom of the $1,222-$1,226 trading range held between 12:45 and 1:30. As of 1:58 PM ET, spot gold was at $1,122.90 for a gain of $14.10 on the day. The Kitco Gold Index split the gain into $10.10 for predominant buying and $4.00 for greenback weakness.

The U.S. Dollar Index reversed its morning decline somewhat after that initial upturn mentioned above. After falling back down and making a double bottom, the Index rose steadily from just after noon. From the 79.75 level it reached 79.90 and above; as of 1:59 PM ET, it was at 79.93. An earlier influence on its drop was S&P removing Grecian sovereign debt from its downgrade watch.

That item may have influenced gold too, upwards, despite it being inconsistent with the safe-haven trade. As far as the greater potential influence of the Fed is concerned, both markets are saying that there'll be no changes or surprises.

Update 1a: Nothing did change. The Fed didn't raise anything and is still using "extended period". The gold price was a little above what it had been, but not by much: $1,126.20 as of 2:28. The U.S. Dollar Index fell, but only momentarily; a little later, it traded in a range centered around 79.8 or so.


Update 2: Regarding the Fed's steadfastedness, the gold market decided that no news was on balance good news. The metal made a valiant try to break above the $1,126 resistance level, but failed to in the end. Still, it was close.

After the Fed announcement, gold spurted up to $1,125 but fell back again to $1,122.50. Then, it leapt up to $1,126 but again pulled back. The third attempt stuck: as of 2:40 PM ET, gold rose from $1,124 all the way up to $1,130.20 as of 3:45. Thereafter, it pulled back, recovered partially, and drifted around $1,128. There it stayed until 5:00, at which point it fell to reach its close. At the end of regular trading, spot gold was at $1,125.90 for a gain of $17.10 on the day. The Kitco Gold Index had the gain apportioned between +$9.60 due to predominant buying and +$7.50 for a weakened greenback.

The U.S. Dollar Index didn't fare all that well during the rest of the afternoon. It was drifting up slightly before the Fed announcement, which it didn't take well to. From 79.94, it dropped to below 79.7 within five minutes of the release. A partial recovery didn't last; by 4 PM, it was well below 79.65, supplying the impetus for gold to rise above its $1,126 resistance level. It drifted up to almost 79.75 in the next hour, but drifted down from 5:00 to 5:30. As of the latter time, it was at 79.66.

Its daily chart shows yesterday's candlestick pair has become a triple:



As I noted yesterday, a pattern heralding a short-term gain the last time it showed did not mean that consequence would repeat this time 'round. Such was the case today. The doubling formed by Friday's and yesterday's action did not lead to a further upturn; instead, yesterday's jump now looks like a relief rally that's passed.

Of note is the RSI line at the top and the MACD lines on the bottom. The former has dipped to below 50; it's either at or below the lowest level since the bull run began early last December. The MACD lines are in a bearish formation: the black line is below the red line. This negativity is indicated by the histogram underneath both. Also of interest: back when they were nearly superimposed upon each other, in mid-late February, the Index pulled back. Previously, in the past few years, such a pattern had been preceded by a rise.

I note, though, that the moving averages in the middle are still in a bullish formation. The 50-day, in blue, is above the 200-day, in red. The latter is no longer falling. The Index's value is still above both.

The Senate bill unveiled to apply sanctions on the PRC for "currency manipulation" gives a fundamental reason behind today's drop. Although the renminbi's value doesn't affect the Index's, that bill sends a message that an angry Senate wants something done about the U.S. trade balance. One easy way to boost exports would be to let the greenback fall, if not push it down. A provision therein instructs Treasury to consult with the Federal Reserve to discuss revaluing (meaning, devaluing) the U.S. dollar as a retaliatory measure if any other nation's currency is found to have been manipulated, and nothing is done about it by that nation's government within 90 days. It's only one of several, but including it sends the message.

So far, this bill is only a warning shot across the bow. Combined with the healing (or dormancy) of the Eurocrisis, though, the potentiality of greenback devaluation is hitting the forex markets. As of this point, there's no way of telling how far it wil go.

That downward pressure gave a boost to gold. As gold's daily chart shows, yesterday's hesitant rally proved to be a primer for today's much stronger one:



No longer is $1,100 the worry. Now, it's $1,125 that's the hope. As the chart shows, the last downturn ended above the previous one in late February. Not enough to bring comfort, but a little above. I have to note, though, that a turnaround decline below $1,140 would bring it into question. The best hope for gold right now, other than a continuation of Eurocrisis-related buying, is a further fall in the greenback.

If Friday's climax be the bottom, however, then we're looking at a different picture. I can't hold out hope, but a close well above $1,140 would look definitely bullish. The only demur I have to add is that a turn of the wind seems only possible if there's a turn in the tide for the U.S. Dollar index - to bearish.

I don't want to pile up too much speculation on that Senate bill, but driving the U.S. dollar down would hit PRC reserves where it hurts: in the value of PRC-owned Treasury securities. I don't know how far things will go, but it's an additional talking point in favor of the Fed "doing something" about the export situation by devaluatory currency intervention. If the forex market takes to the message, any Fed actoin might be superfluous.

Time will tell; the game at this stage will likely end in brinksmanship. If the bill passes, then the PRC may just let the renminbi float upwards a little until the storm passes. That bill, if it become law in its present form, authorizes no action if the offending nation takes steps to upvalue its currency within 60 days of it being found a currency manipulator. The Fed may well do nothing to the foreign-exchange market, and the market itself may calm down and get back to the old track. Given the way the Index is performing, that likely means a time for churning.

Tomorrow will reveal the next turn of the worm...if any.