Friday, April 23, 2010

Catalyzed By U.S. Housing Data And Grecian Bailout Request, Gold Tears Upwards

The doldrum period for gold has come to an abrupt end. Primed by the news that Greece is formally seeking a 45 billion Euro bailout package, and sparked by an almost unbelievable increase in U.S. new home sales for March, gold went on a tear that not only erased an early-morning decline but also put a double-digit gain on the metal's price.

Earlier in the regular session, the metal wasn't doing all that well. Prompted by renewed strength in the greenback, gold sunk from $1,143 to just above $1,135 between 8:20 and 9:00 AM ET. After dawdling around the $1,137 level, and dipping back to $1,135 as of 9:45, the metal went on a powerful rally that pushed it up to $1,158.20 by 11:15. That rally was not only strong, but long; it lasted about an hour and a half. Subsequently, the metal took a rest and dipped down to and below the $1,155 level. As of 11:57 AM, the spot price was $1,153.90 for a gain of $12.60 on the day. The Kitco Gold Index split the gain into $10.40 for predominant buying and $2.20 for a weakening greenback.

The U.S. Dollar Index did fall back to below 81.5 as the implication of a bailout for the Euro sunk in. Peaking at 81.93 as of 9:30, the Index at first sunk slowly. That decline accelerated in the next hour and didn't stop until it was well below 81.5. Since then, it's been trading raggedly but with a saucerish downward bias turning into a slight upward bias. As of 11:59, it was at 81.49

This morning's rally was impressive, but it's not likely to be built upon this afternoon. Still, given gold's recent weakness, a close above $1,150 would still be impressive.

Update: Gold's pullback continued as the pit session ended. Although the metal did get back up to a little above $1,155 around 12:20, it pulled back to between $1,152-$1,153. It came nowhere close to $1,150. As of 1:40, the spot price was $1,153.80 for a gain of $12.50 on the day. The Kitco Gold Index divided the gain into $9.70 for predominant buying and $2.80 for weakness in the greenback.

The U.S. Dollar Index stayed below 81.5 in the early afternoon, although in a relatively narrow trading range between that same 81.5 and 81.45. As of 1:40, it had dipped slightly below the bottom of the range to 81.44.

As the week ends, there's a good chance that gold will hold above $1,150 for a sizable gain. It may not be double-digit, but it'll be close. The rest of regular trading is almost surely going to be quiet.

Update 2: The metal not only held above $1,150, but also bested and closed above $1,155. A mid-afternoon drop in the greenback was the cause.

As the pit shift closed, gold reached its afternoon low of about $1,153. The price started climbing around 1:30 PM ET; $1,155 was reached just before 2:00. It meandered at that level until 3:30, and climbed again albeit slowly. At the end of the trading week, spot gold closed at $1,157.50 for a gain of $16.20 on the day. The Kitco Gold Index split the gain into +$11.70 for predominant buying and +$4.50 for a weakening greenback.

For the week, due to last Friday's Goldman-related plummet, the metal gained $20.70 or 1.82%. Almost all of that gain came as a result of today's upsurge, which reflects the difficulties gold had this week except for today.

The U.S. Dollar Index didn't hold its 81.45-81.5 range; that range broke on the downside shortly after the pit shift ended. After some hesitation, the Index plopped down to 81.31 as of 2:05. After meandering around the 81.335 level until 3:00, it leapt up for a partial recovery of its earlier losses. Until the very end of the sesssion, the rest of the afternoon saw the Index in a range centered around 80.405. In the last ten minutes of trading, it dropped below to close at 81.35.

Its daily chart, from, also shows its strength earlier in the day before the Eurocrisis trade started to unwind:

In fact, the Index showed a lot of strength earlier in the day, opening around 82 before dropping to close at a loss on the day. Even though it did, its MACD lines switched to a bullish configuration today. Despite today's reversal, the short-term performance of the Index has been fairly impressive.

For perspective's sake, the bottom in mid-month was 80. March 17th was 79.5. April 8th's top was just below 82. Today's top, if it be one, was above 82. It's close, but there's a higher high and higher low for this run-up.

Granted that the fiscal powder keg in Greece was responsible, and that impetus may fade if the Grecian government gets its bailout request granted. The Index pulling back for this reason would leave it in a wide trading range between 80 and 82. For that to happen, there has to be a decline to 80 and no rise significantly above 82. That's possible, as is a lesser sink-down with no rally above 82, but the Index's performance up to this morning was fairly strong. Even if the Index keeps falling, even if it heads back down to 81, I'd still watch for any reversal that takes it above 81.5 and towards 82. Today's bulge-up actually took it above the level needed for a clean inverse head and shoulders pattern; one may still be in the offing.

Turning to gold, its own performance was fairly impressive after its early-week doldrums:

In my comments from more than a week ago, I picked the $1,120 and $1,125 figures out of my hat as hypothetical bottoms. As it turned out, last Monday's interday low was within that range. A more optimistic person could argue that Monday's interday low was an outlier, and the real bottom was $1,135. Be that as it may, today's candlestick shows something not often seen: a nice run-up with no "top" to the candle, implying a close at the daily high.

Me saying so gives the impression of me being a wet blanket, but I wouldn't assume right now that gold is moving above $1,160 and staying there. Despite gold's own strength, the strength of the greenback has to be kept in mind. If it co-operates by weakening further, we may see a run all the way up to $1,170. If the bailout-related strength in gold continues to exert its influence, we may see the same thing. Both concurrently could result in a run well above $1,170. In any of these cases, it's likely that the MACD lines at the bottom of gold's chart will switch back to a bullish configuration, making the four-day stretch in bearish territory little more than a fake-out.

I'd wait until said break-out before believing it, though. Granted that my skepticism was untoward during the last run-up, and it's based upon an inverse correlation between the greenback and gold that may be blinding me right now, but I still express caution. That doesn't mean I believe today's rally wasn't for real.

This being Friday, the Commitment of Traders graphs are out for both gold and the U.S. Dollar Index. Gold's, which shows commitments as of last Tuesday, showed a slight drop in open interest overall. The number of commercial-long contracts increased by 4,492 contracts, or 3.32%. Commercial shorts decreased by 1,596 contracts, or 0.400%. Interestingly, non-commercial shorts dropped by 1,294 contracts or by 3.02%. Evidently, some non-commercial shorters decided to cover in the wake of Monday's short-term bottom. Non-commercial longs shrunk by the most: 11,355 contracts, or 4.32%. All in all, though, there wasn't that much change despite last Monday's end to last Friday's Goldman-related plummet.

As of last Tuesday, the U.S. Dollar Index was in the near-beginning of its run but was also tailing off at just above 81. At the time, it looked as if the rally could be cresting. Consequently, its own CoT graph shows a further shrinkage of open interest. This time, non-commerical shorts as well as non-commercial longs seem to have been caught with their pants down. Total open interest shrunk by 2,277 contracts, or 5.10%. Non-commerical longs shrunk by 1,792 contracts, or 5.40%. Non-commerial shorts increased by 904 contracts or 16.4%. On the commercial side, longs shrunk slightly by 130 contracts, or 2.15%; shorts shrunk by a much wider margin: 3.087 contracts, or 8.47%. Taken collectively, all categories were surprised by the subsequent continuation of the rally. That's not good for greenback bears, as it suggests that the rally was greeted with skepticism rather then optimism and hype. The overall picture suggests that last week's run was for real.

We may be in for a week where the Index pulls back and gold rallies in consequence - or, I dare say, a week when both are up. My cautionary words above may belie what I'm about to say, but gold's technical position is fairly good right now.

Again, thanks for reading. May your weekend be a cheery one.

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