Yesterday's Recovery Fizzles; Gold Back Below $1,100

The Euro is still being battered on account of fears that a rescue package for the Grecian government won't be put together this week. U.K. inflation came in at a less-than-expected figure of 3% for February. The surprise announcement of a mainland Chinese trade deficit last month has not only led to speculation about the U.S.-PRC spat over the renminbi's value, but also talk about the People's Bank of China raising rates like the Reserve Bank of India did last Friday. Philadelphia Fed Bank President Charles Plosser gave a speech yesterday that expressed his preference for simple rules such as inflation targeting and leaning against the economic-growth wind instead of using more diffuse measures like output or unemployment gaps. It could be interepreted as his unconfortableness with a too-easy monetary policy.

As heartening as the last item may be to gold bulls, the harder news items reflected a worse clime for the metal - particularly the continued drop in the Euro, which has sunk to about the same level it was at when the Eurocrisis erupted. After starting off the overnight session with a dip, gold recovered to the $1,105 level and stayed around there until early this morning (ET). A decline started at about 1:15 AM ET that was initially slow but steady. After a small recovery rally, which started at 4 AM after gold touched $1,102, the decline resumed. $1,100 was broken just before 7:00, and the drop continued through it. Bottoming at $1,093.60, the trend reversed at just before 8:00. As of 8:16 AM ET, spot gold was at $1,097.50 for a loss of $5.10 on the day. The Kitco Gold Index assigned -$0.10 to predominant selling and $5.00 to greenback strength.

After starting off the evening session in a trading range, the U.S. Dollar Index climbed somewhat before settling back into another range that was narrower and slightly higher than the first one. Starting at 1 AM, though, it began rising. From the 80.6 level, it reached the 80.85 level by 3:40. A two-hour pause was followed by another rally that took the Index up to just above 81 by 8:00. Since that time, it's pulled back a little; as of 8:28 AM ET, it was at 80.93.

The euro's fall was the cause featured in a Wall Street Journal article, which cited analysts saying that a sustained drop below $1.35 could trigger a drop to below $1,090 for the metal triggered by long liquidation.

Germany's stance of opposing an aid package for Greece is increasingly at odds with other EU members, raising uncertainty for the stability of the euro. Meanwhile, Greece's finance minister Tuesday said the country had no need of financial assistance but urged the EU to take measures that would ensure stability in the euro zone.

The same cause was highlighted in a Reuters article, which also mentions the $1.35 level as being crucial. An expert quoted also points out the risk of a further drop, and adds:

"As soon as gold gets to $1,095, there is really decent physical demand, especially out of Asia, supporting it. That is still in place, but that buying must be finite. If the dollar continues to strengthen, the bias must be for gold to go lower."

Also mentioned was the EU meeting on Thursday and Friday, which is expected to come up with some sort of indirect aid package for the Grecian government. If not, then the Euro might well fall below $1.35.

A more exact cause was fingered by a Bloomberg report, as webbed by Business Week:

The dollar climbed as much as 0.4 percent against the euro after European Central Bank President Jean-Claude Trichet spoke out against offering low-interest loans for which the Greek government has pressed. Gold typically moves inversely to the greenback....

Trichet’s demand for stringent terms and German Chancellor Angela Merkel’s push for sanctions against nations that breach deficit limits heightened chances that Greece will leave a March 25-26 summit empty-handed. Prime Minister George Papandreou has said he’ll turn to the International Monetary Fund for aid if necessary.

The experts quoted in this article are more bearish than the ones quoted or cited in the above two: one has predicted a possible drop to $1,030.

Regular trading began by stalling the above-mentioned rally. A period of fluctuation prefaced a drop, which brought spot gold down to $1,095.90 as of 8:49 AM. The day's loss of $6.70 was divided into -$2.50 for predominant selling and -$4.20 for a strengthening greenback by the Kitco Gold Index. The U.S. Dollar Index sunk a little further; as of 8:52, it was at 80.875.

Now that gold is below $1,100 again, the fear is back. Eurocrisis worries have spilled over explicitly into analyst commentary about the gold market. I note that the only way for gold to surprise would be to the upside. However, that's unlikely as of now.