Gold Closes Well Above $1,100

It wasn't hard to find the reason why gold pulled back from an early morning advance and started slogging along: the U.S. Dollar Index rose well above 80 and even above 80.25.

After fluctuating between $1,105 and $1,107 until just after 9 AM, spot gold dropped to $1,104. It spent some time around that level until 9:45, when it made a run that carried the price up to almost $1,108. A quick double top ensued which was followed by an interrupted drop that carried the metal down to $1,104 again. Around 11:15, another decline erupted; this one took gold down to $1,100.50 quickly. This one, like the last ones, didn't serve as a plummet catalyst; gold recovered somewhat. As of 11:50 AM ET, spot gold was at $1,103.40 for a gain of $1.90 since Friday's close. The Kitco Gold Index attributed an $8.90 gain to predominant buying and a $7.00 drop due to a strengthening greenback. The two figures, of course, add up to the overall gain.

The U.S. Dollar Index is indeed pulling up. After bumping up against the 80.15 level near the start of regular trading, it broke through at 10 and skipped up to 80.19. After a slight pullback, it rose all the way to 80.355 as of 11:19 before pulling back once again. As of 11:52 AM ET, it was at 80.30.

Despite the downward push that the greenback has given gold, the metal is still holding at over $1,100. That support level might be tested later today, but it still looks solid.


Update: Gold hasn't declined further from that level; in fact, it's pulled back up.

After another spill just after noon ET, to about $1,101.50, the price recovered to almost $1,106 before pulling back somewhat. Another spill between 1:10 and 1:15 was completely reversed, and gold went back up to the $1,105 level. As of 1:41 PM, the spot price was at $1,106.20 for a gain of $4.70. The Kitco Gold Index assigned an $11.50 gain due to predominant buying and $6.80 loss due to greenback strength.

That strength has ebbed, but has not been replaced by a decline worth mentioning. The U.S. Dollar Index has essentially gone nowhere. After a push up to 80.39 just before noon, the Index slowly slid back to 80.3, where it all-but halted. As of 1:43 PM ET, it was at almost where it was as of the time given in the original post: 80.29.

$1,100 is holding. Unless there's a nasty surprise sometime in the later afternoon, it will continue to hold. The chances are good that gold will close with a daily gain.


Update 2: It not only closed with a daily gain, but it also gained in the afternoon session. For the first time in six sessions, there's a sense of a real pickup.

Gold spent the rest of the afternoon climbing, not too quickly but steadily. A jump to $1,107 started at 1:15 PM ET and ended at 1:45; after dawdling at the $1,107 level, the metal took a dive to $1,105.50. Ending at 2:10, the dive was replaced by a steady climb upwards 'til the end of regular trading. At the close, spot gold was at $1,108.80 for a gain of $7.30 since the end of last week. The Kitco Gold Index chalked up a rather high +$13.50 due to predominant buying, and -$6.20 due to strength in the greenback.

That strength lessened as the afternoon wore on. Starting from 1 PM and lasting for a little more than three hours, the U.S. Dollar Index gently slid down; as of 4:10, it was at just above 80.2. Since then, it bobbed in a trading range that ramped up slightly near the close. As of 5:30 PM, the Index was at 80.225.

The daily chart (from Stockcharts.com) shows an unusual pattern over the last two trading days, one that was on the chart relatively recently:



The pattern I refer to, in the rightmost part of the action, is two candlesticks side by side: one red, the other white. The last time the same pattern was there, was February 16th and 17th. What followed back then was a two-day upwards jolt; once over, and once a compensatory decline had set in, the Index was still higher than it was on those two days.

There's far from a guarantee that the same result will follow from Friday and today's version of the same pattern. However, a run up to 80.5 shouldn't be dismissed out of hand. The Fed meeting tomorrow may contain publicly-released remarks that foster a higher greenback.

As for gold, its daily chart shows that last week's decline has been definitely interrupted:



Given the above-noted strength in predominant (or ex-dollar) buying noted above, there's some grounds to believe that the worm is turning. The strength seems supplied by a little more than bargain-hunting; the sovereign-risk meme seems to be spreading. If gold contunues to go up, which it may not, the $1,120 level is the one to watch. If the metal tries and fails to close above it, and turns back down to $1,100, that support level is at risk of being breached. At the least, a pullback of that sort would make some gold longs nervous (and tighten their stops.)

The hedge-against-sovereign-risk theme is referred to as "alternate currency" in a Wall Street Journal report, which notes its attractiveness despite lower risk appetite and the strengthened greenback:

A firmer U.S. dollar would typically weaken the metal by making dollar denominated gold more expensive for buyers using other currencies. Also, gold has been trading inversely to the greenback as a risk play along with equities, other commodities and higher yielding currencies in recent months.

But on Monday, the metal found support from one of its historical roles as an alternative currency. Gold is often seen as an alternative to paper money because it doesn't have counterparty risk and because it is physically deliverable and portable.

"Right now there doesn't appear anywhere safe," says Michael Gross, broker and futures analyst with OptionSellers.com. "There's some flight-to-quality issues going on in gold ... which is always going to be its own currency."

Gross is also noted as saying that gold is benefitting along with the U.S. dollar by safe-haven buying. Another analyst said that the flight-to-safety component is particularly strong for European buyers.

Today's rally may only be a relief rally, but it can definitely be called a relief. How durable it is, though, is still an open question. The rest of this week's trading will supply the answer, particularly tomorrow's.