Gold Takes Tumble, But Recovers

The U.S. dollar has come back, and that resurgence has taken its toll on gold. The Eurocrisis is the cause, as any aid to the Grecian government has not been forthcoming as expected. Credit default swap prices on Grecian sovereign debt have risen as a result, and prices for the bonds themselves have dropped. So have prices for bonds of Spain and Portugal.

Building on a slight rally that started in the data-release window today, the U.S. Dollar Index has climbed up in later-morning trading. As of 10 AM ET, it was at 79.95. As of 11 AM ET, it was at 80.05. As of 11:30 AM ET, it was at 80.32.

That strength has taken its toll on gold. Regular trading opened with a slight handicapping rally, which was drained off by the release of the CPI data. Another handicapping rally just before 10 AM was defeated too, and the metal stumbled starting at 10:30. For $1,125, it reached $1,121 just before 11 AM. After a recovery rally to $1,123, the price dropped to $1,119 between 11:10 and 11:15. As of 11:34 AM ET, spot gold was at $1,119.90 for a drop of $5.20 on the day. The Kitco Gold Index sliced $9.05 off the price due to U.S. dollar strength, and actually added $3.85 due to predominant buying. The influence of the Eurocrisis is being felt both ways, even if the net was not beneficial to gold as of late morning.

The U.S. Dollar Index was still rallying. Gold stopped declining for the moment, but it dropped enough to make the $1,125 resistance level a reality again. The afternoon sesssion will show how vulnerable gold is to futher adverse winds.


Update: The dip down to the $1,120 level didn't last; the $1,125 resistance level turned into support.

[Note: For some reason most of the first Update was lost. The meat of it has been incorporated into Update 2.]


Update 2: Gold ended with a gain on the day, but it was only a slight one. The afternoon saw a recovery from the late-morning spill, as the latest round of the Eurocrisis faded away.

Actually, the Eurocrisis provided much of the lift for gold once the safe-haven demand moved out of the greenback. The U.S. dollar, although strong in the morning, pulled back in the early afternoon before making a saucer-shaped bottom around 2 PM. Gold felt the influence of the greenback creeping upwards, but not enough to take it away from the plus column.

Between 11:15 AM ET and just before noon, gold was stuck at $1,120. Then, just after 12:45, it plopped down to $1,107.60; that drop quickly reversed itself. Then, a rally took the price up eight dollars an ounce by 12:25. Trading was indecisive until 1:20 PM, when another rally developed which took gold up to $1,130.70 right after 1:30. After another period of hesitation, the metal fell down and entered a range between $1,126 and $1,128; it stayed there until closing. As of the close, spot gold was at $1,125.90 for a gain of eighty cents on the day. The Kitco Gold Index attributed an $8.90 gain to predominant buying and an $8.10 loss to greenback strength.

After its rally climaxed at 11:40 AM, the U.S. Dollar Index traded relatively sedately. Declining from that level, it slid until it hit 80.13 as of 2 PM. At that point, the decline reversed and a small rally ensued. Although uneven, it pulled the Index up for the next three-and-a-half hours. As of 5:30 PM, the Index was at 80.31.

The daily chart for it (from Stockcharts.com) shows a pretty wild ride today, but one that's been inconclusive:



As the rightmost candlestock shows, the Index veered all the way today from the support level of 79.5 to the resistance level of 80.5. That's a fair span for the Index, especially within a trading range that's held up. The 79.5- 80.5 range has held for the last five trading sessions with no real breakout one way or the other. The close was strong, but was almost at the same level as Monday's.

There's still an overall neutrality in its trading pattern. The bearish take on today's action notes that, despite widespread fears that the Eurocrisis was going to resume because EU aid is far from a done deal, the Index never got above 80.5. The bullish take notes that nothing more than rumours and fears, and generalizations from an ultimatum that might have been a mere negotiating ploy, got the Index well above 80; had the Eurocrisis re-erupted for real, the Index would have flown upwards.

That being said, the near-term trend is still directionless. Also adding to Index bullishness are signs that PRC officials might co-operate with the U.S. government with a renminbi upvaluation.

As for gold, today's gain comes on the tail end of a three-day session whose candlesticks look "blocky:"



The blockiness shows a resistance level just above $1,125, which gold has had a hard time overcoming. It's reminiscent of the action between Feb. 16th and 22nd, although at five dollars greater. Of interest is the fact that the MACD lines on the bottom of the chart have turned from a bearish configuration to a bullish one today; that's indicated by the histogram that they're drawn over. There was a fake-out of that sort on Feb. 3rd, so I merely note today's crossover. The now-ended bearish phase has been unusually short, and may be destined to be longer. Until today's crossover has been backed up by a second day in a bull phase, and possibly a third, it's just a curiosity.

It speaks to a near-term directionlessness in gold, however. Although $1,140 is closer than $1,100, it still could go either way depending upon how events play out. On the good side, for a technical analyst, gold's 50-day moving average (in blue) is not falling.

A Reuters report describes today's action this way: "the metal whipsawed between a stronger dollar and buying driven by sovereign debt worries." It also had this to say about today's trading, amongst other things:

* U.S. consumer prices unchanged in February, failing to drive gold in a definite direction - traders.

* The metal holds firm despite a weaker euro against dollar amid renewed Greece worries.

* Disagreement between United States and China over trade, currency issues provides underlying support to gold - HSBC.

The picture could be worse for gold, especially given the rebound in the U.S. Dollar Index, but it also could be better. Today was a day that could be chalked up to marking time while bound in a range. Tomorrow may provide a greater sense of direction.