Gold Trundles Along

Regular trading opened on an optimistic note, which was wrecked by a drop to just above $1,100 between 8:30 and 8:45 AM ET. After dawdling at a little above $1,101, the metal made two runs upwards that weren't sustained. The first peaked at $1,105.50 at about 9:30; the end brought gold all the way down to $1,100.50. The second propelled gold above $1,108.50; at the end, the metal dropped down to $1,104.50. The latter rise was a little more than a spike, as gold drifted around $1,106-7 before falling back to $1,103. As of 11:42 AM ET, spot gold was at $1,104.90 for a drop of $3.30 on the day. The Kitco Gold Index attributed a $4.00 loss caused by predominant selling and a $0.70 gain due to a weakening greenback.

The U.S. Dollar Index has weakened, with 80.5 becoming a memory. After bolting up at 8:30, it pulled down after making another run at 8:38. That run took the Index a little above 80.5, but a further attempt at rallying only resulted in an upwards slog. After dropping back a little, the Index rallied to make a double top. Then, staring at just before 10:00, it dropped sharply and continued to drop more slowly. By 10:42, it was below 80.3. A rally starting at 11:00 only reached 80.41, and the Index descended further in a choppy fashion. As of 11:43 AM ET, it was at 80.35.

An inverse influence has reappeared; the decline of the dollar is helping gold at its current low level. There's a chance of another plummet today, but not that big of one. The afternoon will tell.


Update: There hasn't. The usual window for such drops has now passed, implying that there won't be one unless a special news announcement slams down the gold market.

In fact, gold has recovered slightly. Since the drop to $1,103 as of 11:10, the price has been slowly and raggedly climbing up. As of 1:27 PM ET, spot gold actually shows a gain on the day. It was at $1,108.80 for a rise of $0.60. The Kitco Gold Index still has a drop due to predominant selling, of $0.70, but the gain for a weakening greenback has increased to $1.30.

The U.S. Dollar Index traded directionlessly since the original post, but the preponderent direction has been down. It was in a trading range between 80.38 and 80.3; as of 1:33 PM, it was at 80.33.

Some relief has crept into the market. The usual bargain hunters haven't been out in full force, but today's action does suggest that the $1,100 support level still triggers the phenomenon. It looks like the worst is over, unless the People's Bank of China throws a spanner in the works overnight.


Update 2: The quiet that often prevails in the mid-late afternoon session held today. After a spill between 1:50 and 2:15, gold crept up to finish with a slight gain.

That spill pulled it out of a trading range bordered by $1,107.50 on the downside and $1,109 on the upside. Gold lost more than three dollars an ounce in that time. Subsequently, though, the price climbed with little interruption for the rest of the day. At the close, spot gold was at $1,109.60 for a gain of $1.40 on the day. Despite that overall gain, the Kitco Gold Index subtracted 45 cents due to predominant selling. $1.85 was added due to greenback weakness. The predominant buying/selling category didn't get into positive territory, suggesting that gold was still reacting from recent record highs in the Euro and pound.

The U.S. Dollar Index hasn't been doing all that well lately. After spending some time in a trading range early this afternoon between 80.32 and 80.37, the Index took a fall to a little below 80.3 and stayed in a narrow trading range bracketed by 80.27 and 80.3. It didn't drop all that much today, but it did drop. The most likely reason is the calming-down in Euroland. To the extent that the recent declines were prompted by unwinding of safe-haven trades, so was gold's. In gold's case it was amplified by declines hitting stops and relatively greater skittishness in that marketplace.

The daily Stockcharts.com chart of the U.S. Dollar Index shows that the pullback wasn't all that much:



The Index might as well be still in a trading range, even though the Eurocrisis that gave it its final rallying push is fading. What's noticeable is the difference between the performance of the Index recently, now that the MACD lines at the bottom of the chart are in bearish formation, and the last time the MACD lines were in the bear zone. [In a bearish formation, the black line is below the red line.] The last time, there was a noticable decline. This time, there's hardly been any at all; just a drooping trading range.

On the other hand, the RSI indicator at the top was sinking on balance even as the Index made a new nine-month high. That signals trouble ahead for the Index.

It's a real mixed picture, one that requires a real interpretive bent to yield a clear message. Longer term, and this may carry the balance for many technicians, the dollar is still in an uptrend. Unless the Index sinks all the way down to 79.0, calling for an outright short-term downtrend would be hasty. It might not even sink below 80.

On the other hand, getting and staying above 81 would be a signal that the bull move is continuing.

Moving to gold, today's price action looks a lot like February 5th's on the daily chart:



That day marked the climax bottom of the four-week downtrend that began on January 12th. Thankfully, the declines over the last three days were not as severe as the single-day decline on February 4th. The similarity of the two suggests that gold's met a fairly solid support level at $1,100. It may be tested tomorrow, but it's holding up for now. From the vantage point of this chart, which uses the nearest-futures price, $1,110 is serving as support too.

What's worrisome about the chart is the extent of the decline so far. It looks like two-thirds of a regular head and shoulders pattern, the kind that signals a further decline below the neckline. If that pattern completes, with neckline at $1,100, we may see a decline back to $1,050 or so. Of course, there's no guarantee that it will. Doing so would take some shocker that would throw the gold market for a real loop after a further rise that tops out below $1,140. Since the pattern isn't even complete, even with the head, I'm being hypothetical. It can be pegged as an early warning, or perhaps as me seeing things.

A Reuters report warns that monetary tightening by the People's Bank of China may weigh down the gold market:

* Strong economic and inflation data out of China fuels speculation of monetary tightening - Bruce Dunn at Auramet.

* Equities uncertainty prompts gold investors to take wait-and-see approach - Adam Klopfenstein at Lind-Waldock.

Also noted, though was the indication of support at $1,100.

I wish I could come out and say that the gold market is going to turn up tomorrow, but the downward gyrations have been too unexpected for me to blithely ignore them. A perhaps-coincidental similarity between now and Feb. 5th isn't enough for me to stick my neck out, particularly since I got mine bruised yesterday. However, we seem to be close to the end of the current decline...even though the People's Bank of China has yet to be heard from.