Gold Takes Unexpected Tumble In Morning Session

Things were going well for gold at the time regular trading opened, but a decline prompted (unexpectedly) by good February retail-sales figures dragged out for more than an hour and a half; it subtracted close to thirteen dollars an ounce from the spot price.

Said drop started right at 8:30 AM, and continued in three stages. Although the initial stage was quick, and took eight dollars off the price, the others weren't. The final climax took place right after 10 AM, when less cheery economic data were released. Gold was driven down more than four dollars an ounce in the next ten minutes; its low of $1,104.60 marked the end of the decline. A relief rally turned into a double bottom, and the price churned in a trading range between $1,108 and $1,110 before pulling back. As of 11:33 AM ET, spot gold was at $1,106.30 for a drop of $3.30 on the day. The Kitco Gold Index assigned a large $9.80 drop to predominant selling, and a gain of $6.50 to a weakening greenback.

The U.S. Dollar Index is still losing ground, although not by much since the opening of regular trading. After drifting upwards to 80, and staying in a trading range, the Index drifted back downwards starting at about 10:20. As of 11:37 AM, it was at 79.81.

"The hits just keep on coming." What better phrase for another disappointing day? Gold may recover from its latest slamdown, though; the afternoon's trading will tell.


Update: So far, it hasn't; in fact, the decline is continuing. After muddling about in a trading range until 11:30 AM ET, gold went on a half-hour slide that took it from $1,110 to a little above $1,100. The latter served as a support level, but gold didn't recover from the latest spill all that much.

To be more specific, gold bottomed at $1,101 at noon. An upward reaction turned into a spike when gold slid back downwards. The low of the day - $1,097.70 - was reached as of 12:45 PM. Gold recovered from that low to above $1,100, but only to the $1,102 level. As of 1:57 PM ET, the spot price was at $1,100.40 for a drop of $9.20 on the day. The Kitco Gold Index knocked off $15.25 for predominant selling and added $6.05 for U.S. dollar weakness to account for the drop. The predominant-selling category has become unusually large.

In fact, the greenback had little to do with the decline; it may be caused by the further unwinding of the Euro safe haven trade. [You don't have to be a European to play; long gold and short Euros would do it for a North American.] Since a modest decline that halted at 11:25, the Index has been churning around a centre around 70.82-.83. As of 1:58, it was at 79.83.

Both the $1,100 support level and normal late-afternoon quieting suggest that gold won't do much from here. Even days like this one have to quit.


Update 2: In the last three-and-a-half hours, the gold market did come to a rest. There was little change during the rest of the afternoon; the $1,100 support level held.

Gold was actually in a trading range since 1 PM, bordered by $1,103 on the upside and $1,100 on the downside. As the session ended, a gentle driftdown still kept gold within the range. At the end of the week, spot gold was at $1,101.50 for a drop of $8.10 on the day. The Kitco Gold Index chalked up $14.90's worth of drop to predominant selling, and $6.80's worth of gain to a weakening U.S. dollar.

The weekly change was a fairly steep drop of $33.40, or 2.94%, from last week's close of $1,134.90. This week was not a good one for gold.

Nor has it been for the U.S. Dollar Index. The rest of the afternoon session was quiet for it too, with the Index fluctuating within a trading range bracketed by 79.8 and 79.845.

The daily chart for it, though, does show some volatility (chart from Stockcharts.com):



Downward volatility, to be exact. As it turned out, the rally to around the 80.5 level was a relief rally. Thanks to the Euro recovering, the U.S. dollar was dragged down in an unusually large move.

The chart is beginning to look potentially bearish for the near term, despite the run the greenback has had. If the decline continues all the way down to 79.5, the Index will have backtracked from its entire collection of gains from early February. Such a drop could be attributed to the Eurocrisis finally easing, but it would also mean that the entire third leg of the still-present bull run would have been eliminated. There are too few clues for me to go out on a limb here, but I suggest watching the 79.5 level.

The unwinding of Eurocrisis trades is the only explanation that ties this week's greenback disappointment with the more acute disappointment in gold:



Yesterday's spiky decline, as we now know, was not the end of the near-term decline. As already noted, $1,100 did hold; the extent of the drop, though, does have a foreboding cast. So does the cross-over of the MACD lines at the bottom. [They're in bullish formation when the black line's above the red.] Thankfully for gold, the last MACD-bull period saw the price end up above where it was at the beginning. That was not the case of the last bull phase in early-mid January.

To be frank, the best hope for gold right now is the Eurocrisis-unwind explanation for its drop. That unwinding has to end sometime, and may have ended already. There's bargain hunting providing support for gold, but that support may fade if the bargain hunters get the idea that gold will go significantly lower.

This week's Committment Of Traders report, as graphed here, shows an expansion of commercial longs as of last Tuesday. Speculative longs were virtually unchanged. Tuesday was the day that this week's decline got rolling, so the COT report shows an unusual picture of commercial longs in gold (if unhedged) getting poleaxed. Speculative shorts were virtually unchanged, and commercial shorts filled the gap by expanding.

The COT for the U.S. Dollar Index, as graphed here, shows speculative longs continuing to get out. As of Tuesday, the Index was straining to get above the 80.5 level. Those who did get out, got out when the getting was good. Interestingly, speculative-short positions also shrunk in the week ending last Tuesday. Significantly, and perhaps sadly, commercial longs increased 44%. Commercial shorts increased slightly.

A Reuters report, as webbed by the Globe And Mail, does attribute this week's $30+ drop to easing of fears about the Eurozone. Also:

Speculation of further money tightening by China and economic uncertainty amid sovereign debt worries out of Europe prompted heavy [futures] liquidation this week.

Gold's losses this week in the wake of a lower dollar indicate the inverse relationship between the metal and the U.S. currency is broken for now, but traders said that could reverse soon.

A trader is quoted as saying that both falling at the same time is unusual. The money exiting gold and the greenback might be going in to the U.S. stock market.

This week's action was discouraging and, for many, surprising. I have to admit to being caught off guard by the declines at least once. For next week, the number 1100 is going to be an important one. Should gold break below that number and stay there, it's not going to be a pretty sight...except for gold shorters.