Thursday, April 15, 2010

After Initial Drop, Gold Climbs Up

The day started off with gold in a loss position, but that loss changed into a gain as early morning turned into late. Thanks to a mid-morning run, gold made it above $1,160 for a time.

The start of regular trading saw a drop that turned out to be a fake-out. After gently declining, gold dropped three dollars an ounce in a spike-down that ended at $1,149.60. Quickly reversing, the price got back up to the $1,152-3 level. After holding at $1,153 until 9:30 AM ET, the metal began a climb that was initially a slog but became more regular as the morning wore on. By 11:05, the price has reached $1,162.40. Pulling back to the $1,160 level, the metal then paused. As of 11:37 AM, spot gold was at $1,160.20 for a gain of $5.40 on the day. The Kitco Gold Index attributed +$9.80 to predominant buying and -$4.40 to a strengthening greenback.

After surging up in pre-regular session trading, the U.S. Dollar Index pulled back part of the way. After a spike-up at 8:30, the Index pulled back to the 80.55-80.6 level until 10:15, when it broke through on the downside. The resultant drop took it down below 80.4 before it reversed course starting at 11:15. As of 11:38, the re-rallying was continuing with the Index at 80.52.

Demand has come back for gold, although its gain was largely prompted by greenback softness that was mostly reversing. That pull-up will limit gold's gains in the afternoon, and may even push the metal back into a loss position in the afternoon.


Update: So far, that hasn't happened. Instead, gold was quite stable in the early-afternoon session. There were fluctuations, but they've been around the $1,160 level since 11:00. For the last two-and-a-half hours, the metal's been in a trading range bordered by $1,158 and $1,162. As of 1:51 PM ET, the spot price was $1,158.90 for a gain of $4.10 on the day. The Kitco Gold Index assigned +$8.80 to predominant buying and -$4.70 to greenback strength.

The U.S. Dollar Index has been fluctuating too, but not as directionlessly. After bottoming at 11:15 AM ET, it climbed all the way to 80.64 by noon. Subsequently, it fell back to the 80.5 level by 1:00 and then bobbed between 80.5 and 80.55. As of 1:51 PM, it was at 80.54.

Recently, the later-afternoon stretch has seen gold pull back; so, there's a chance of the gain evaporating before the close. It's not a certainly, though. The rest of the afternoon will reveal if the metal will stay in the plus column.


Update 2: It did. There was a decline in the rest of the afternoon, but not much of one. The range held, even if the metal was in the lower half of it for most of the mid-late afternoon part of the session.

As of the close, the spot price was $1,158.80 for a gain of $4.00 on the day. The Kitco Gold Index attributed +$7.50 to predominant buying and -$3.50 to a strengthening greenback. The two values sum up to the day's change.

The U.S. Dollar Index spent the rest of the afternoon on a downward slide, which took place in three stages. The total extent of the drop wasn't much, though: as of 1:50 PM ET, the Index was just above 80.55. From 2:30 to 5:05, the 80.45 level wasn't breached on the downside. By 5:30, the Index was at 80.44. The overall thrust was downwards, but the extent of the drop wasn't much.

Its daily chart, from Stockcharts.com, shows a bit of a recovery from yesterday's level, but not much of one:



The candlestick corresponding to today's action is basically beside yesterday's, indicating a trading range. Again, the Index sunk to 80 during the day and, again, the high was at about 80.75. The short-term trading range it's been stuck in has now lasted four days.

Including a day when resumed fears about the Grecian government's debt load pushed down the Euro. That day was today: to be specific, early this morning. Despite that tailwind for the Index, it hasn't managed to capitalize all that much on the fears. Instead of a breakout from the current range, it moved to the upper end. It looks like an all-out Grecian credit event would be needed to give it a solid push upwards.

Certainly, nothing other than the Eurocrisis has recently. The recent data stream on the U.S. economy hasn't been hurting the greenback, but it hasn't been helping all that much. Had the Eurocrisis not erupted, the Index wouldn't have gotten up to the 82 level and might not have gotten above 80. Of course, had the crisis not erupted, gold would have not gone as low as it did initially - but also, it wouldn't have gotten as high as it had in terms of the Euro and the pound more recently.

Speaking of gold, its own daily chart shows a short-term pattern that's been not very evident this year: a downward reaction of only two days followed by two days of modest gains:



The reaction itself was quite limited in extent, too. From the $1,170 top, it got down as low as $1,150 but not much farther. Now, two days' worth of gains have pushed it up to $1,160. It almost seems to be too good to be true, given the metal's more substantial downward reactions this year.

This buoyancy is the result of a Eurocrisis-related breakout that forged up despite the U.S. dollar not falling. The recent troubles the greenback has been having have cushioned the pullback. In the absence of any other driver, most notably a ramp-up in inflation, a falling greenback is all that gold has going for it right now. The post-Eurocrisis buying trend may continue, on the anticipation or consummation of a bailout for the Grecian government, but that push isn't likely to be a strong and steady one right now. Another source of upward pressure would be an increase in investment demand, in anticipation of more inflation down the road. We are seeing a pick-up of that sort brewing. Again, though, this trend doesn't seem to be much of a momentum-adder. That's not bad news, as mometum taketh away as well as giveth, but it doesn't make for a solid run upwards.

In the absence of immediate drivers, my own hunches say that gold has some pullback left in it. The gains may continue, but I don't see them doing so for much longer a run. Gold is still on the overbought side of things; at the very least, it's far from being oversold. As I've said before, I'm expecting a pullback - not an outright decline back into early-year territory. Another factor to consider is that May has been a good month for gold, except for '09 and '08 when February took the cake. February last being what it was, the month didn't for this year. We seem to be going back to May as the good month; certainly, April has been so far. The trouble with that seasonality, though, is that the summer months have not been good for the metal. Once May is through, a summer stickiness is likely to keep the price from moving up until the autumn. Last year, the good times began in September. In '08, although the low was made in late October, it wasn't until November that things got rolling again for gold. On '07, the bull train got rolling in early September. September of '08 saw a good run too, which was kneecapped by the credit crisis. So, based upon recent seasonal patterns, any sustained run after May won't be starting until September. "Sell in May, go away,/Don't remember 'til September" might well kick in again this year.

That said, it's only mid-April and the gold market is holding up well. May might be a good month, although I hestiate at making a prediction for any May top.

This afternoon Reuters post-pit-session wrap-up categorizes gold as defying today's rise in the greenback. Continued safe-haven buying is named as the cause. Amongst other points, these were made therein:
* Until there is a firm resolution in Greece's debt problem, gold will benefit despite a dollar rise - Frank McGhee at Integrated Brokerage Services.

* IMF said it will hold talks with Athens about possible IMF assistance, fueling uncertainties.

* Gold sentiment dented as China's unexpected strong annual economic growth triggers monetary tightening concerns.
Despite some bad news mixed in with the good, gold still prevailed.

Tomorrow may be another story, but any decline doesn't look like it will be severe or even sustained. We might be seeing a trading range develop.

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