Gold Stalls As Rally Drains Away

Although the overnight action for gold built on yesterday's strong rally, that additional gain vanished when regular trading opened. The lower-than-expected raw wholesale price index figure had an influence, but the main cause seems to be buyers' exhaustion and a pickup in the U.S. dollar.

When regular trading opened, gold was hovering around $1,128. From 8:20 to 9:20, though, the metal entered a three-stage decline that took it down to just above $1,123. The price pulled up to $1,128, but that pullback didn't hold; another decline took hold until 11 AM ET, leaving the price at $1,122. Although there was a rally since then, $1,125 has gone from a support level to a resistance level. The major resistance level, at $1,130, was only breached this morning and only for two unsustainable periods.

As of 11:50 AM, spot gold was at $1124.10 for a loss of $1.80 on the day. The Kitco Gold Index divided the overall loss into $0.40 attributed to predominant selling and $1.40 to a strengthening greenback.

The U.S. Dollar Index did recover, after bumping in to the 79.5 support level early this morning. When regular trading opened, it fluctuated in a gradually rising range centered around 79.7. That range was broken at 11:05, when the Index broke through to almost 79.83 as of 11:11. Since then, it's been trading more indecisively but with an overall rising bias. As of 11:52 AM, the Index was at 79.76.

So far, it's been a somewhat disappointing day but not a wholly unexpected one. Longer-term traders who say "call me when it stays above $1,140" have a point.

As of now, it's be something if the metal gets and stays above $1,125 again. The afternoon will show if it's achieved.


Update: It hasn't been so far, even though the U.S. Dollar Index took a large dip recently. After spending the last hour of the morning in a trading range bordered by $1,123.75 and $1,125, gold dipped below and then lifted above it. Right after 12:30, though, the price took a dive down to $1,120.60. Although that dive was mostly recovered from, the metal was still below $1,125. As of 1:42 PM ET, spot gold was at $1,124.90 for a loss of $1.00 on the day. The Kitco Gold Index assigned -$3.10 to predominant selling and +$2.10 to a weakening greenback.

The U.S. Dollar Index did take a fall, as mentioned above; in fact, it's been falling since 11:37 AM. The decline wasn't uninterrupted, but it was a fairly smooth ride downwards. As of 1:44 PM ET, the Index was at 79.52.

Again, resistance popped up at $1,125 for gold. The rest of the day will show whether or not it prevails.


Update 2: $1,125 did prevail; the gains at the beginning of the day melted into a slight closing loss.

After spending an hour and a half around the $1,124 level, which ended at 2:30 PM ET, gold went into a two-stage decline interrupted by another rest period. By 3:40, the metal had sunk to $1,117.50. The price snapped back to the $1,120 level, though, and continued along there until just before 5:00. A closing rally, normally unusual for the metal, pushed it all the way up to $1,125 where it stopped. As of the clsoe of regular trading, spot gold was at $1,125.10 for a loss of $0.80 on the day. The Kitco Gold Index divvied up the loss into -$0.10 for predominant selling and -$0.70 for strengthening of the greenback.

The U.S. Dollar Index wasn't all that strong earlier this afternoon. It bumped against the 79.5 resistance level just before 2:00, but pulled up afterwards. It was almost at 79.75 by 3:40, making a counterpoint to the mid-afternoon gold decline. For the rest of the session, the Index drifted in a range between 79.7 and 79.75. As of 5:30 PM ET, it was at 79.725.

The daily chart (from Stockcharts.com) shows the 79.5 support level, and the extent to which February's gains have been erased:



In hindsight, the Eurocrisis proved to be more climax than driver; the fact that the Index didn't shoot up during it was a warning sign that its recent bull run wasn't very substantial. (Of course, hindsight is 20/20.) It closed today at almost exactly the same level it was at as of February 9th's, which makes for a less-than-pretty picture for greenback bulls.

Still, 79.5 has held - and the decline that's matched the most recent bear cross in the MACD lines at the bottom hasn't been all that much. The slog upwards has been met by a slog downwards, suggesting that any further fall isn't going to be that great in extent.

One item of note that pertains to the Euro component: last Friday's Committment of Traders report shows that, as of eight days ago, there was a new record high in non-commercial shorting of the Euro. Given how it's performed since, a short squeeze isn't out of the cards; it may already be happening. At any rate, the non-commercials are back in the shorn-sheep category.

Turning to gold: the daily chart, which uses the nearest futures month and whose close is recorded when pit trading ends at 1:30 PM, shows a more extensive decline than the one recorded above:



$1,120 did hold as a near-term support level, but today's result means that the advance lasted only two days. There's a case to be made that today's decline was the result of the metal going too far, too fast yesterday. [See the comments.]

Gold resuming its uptrend tomorrow would be great, but it seems too much to be asked for at this point. Again, the overall chart doesn't give a commenter/prognosticator much to chew on regarding near-term action - and won't unless $1,140 is broken on the upside or a decline emerges in earnest.

A Wall Street Journal report ties with in the too-far-too-fast explanation:

Participants were thinking prices are high enough for the moment after the previous session's marked gains, said Patrick Donnelly, a senior market strategist at Olympus Futures.

The metal was having trouble at resistance at the $1,130 area, he said.

Also, according to another source cited in the article, the decline in the greenback was met with a little skepticism.

It was a day where people were waiting for another shoe to drop; it might tomorrow. The pullback was fairly restrained, all things considered, and tomorrow might see another rally attempt that breaks well above $1,125. We'll see.