Friday, April 30, 2010

Gold, After Early-Morning Run, Pauses

Regular trading began with a slide down to $1,173, but that drop proved to be misleading. Catalyzed in part by U.S. first-quarter GDP results, the metal reversed direction and marched up to $1,180 by 9:45 AM ET. After slumping a little, it forded back up above that level - although labouredly at that point. The peak of the day came a little after 10:30, at $1,182.50. Since then, the metal pulled back a little and marked time in a range between $1,179 and $1,180 before advancing a little. As of 11:53 AM, the spot price was $1,180.80 for a gain of $13.60 on the day. The Kitco Gold Index divvied up the gain into +$11.90 for predominant buying and +$1.70 for weakness in the greenback.

The U.S. Dollar Index recovered from its earlier-morning slump down to the 81.65 level, but an attempt to get above 82 didn't last. The run-up started just before 9:30, and carried the Index up to 82.07 in a last-minute burst of buying as of 11:00. Since then, it's tailed back somewhat to just above 81.85. As of 11:56 AM, it was at 81.87.

Gold's run this morning may be the end of its ramp-up for the week. According to this Kitco report, shorters getting out of town and momentum buying are the two main internal causes for its gains. Sentiment is already largely bullish, which is a sign that buying power may lessen as new bulls become scarcer. Whatever the afternoon holds, though, the metal's got a good daily gain in the bag; there are no storm clouds evident.

Update: By a nice coincidence, gold had a "high noon" moment today. After inching up for an hour at 11:00 AM ET, the price spiked up to make a new 2010 high of $1183.00...almost right at noon. That spike didn't last, and gold pulled back after a little indecisiveness. After slumping to below $1,178, gold spent some time in a range bordered by $1,177.50 and $1,179 before pulling up a little. As of 1:47 PM ET, the spot price was $1,180.00 for a gain of $12.60 on the day. The Kitco Gold Index split the gain into +$11.70 for predominant buying and +$0.90 for a weakening greenback.

Although a little weak over the course of the day, the U.S. Dollar Index was steady in early afternoon. Drifting between 81.85 and 82.05, there was fluctuation but little direction. As of 1:48 PM, the Index was at 81.93.

As the end of the week approaches, the gold market is likely to be quiet; it should be steady. There's a fair shot of the metal ending the week and the month at about $1,180.

Update 2: The high-noon high held as the rest of the week's trading proved to be listless. $1,180 turned out to be unreached at the close, but the metal did poke its nose above that level a few times during the electronic-trading part of the session.

The rest of the afternoon saw gold range-bound, between $1,178 and $1,180. At the close, the metal ended slightly above the middle of the range: $1,179.30, for a day's gain of $12.10. The Kitco Gold Index (KGX) attributed +$10.60 to predominant buying and +$1.50 to weakness in the greenback. KGX tracking of gold ex-greenback made another record closing high today.

Last week's close was $1,157.50. For the week, gold was up $21.80, or 1.88%. This week's gain was slightly larger that last week's. For the month, gold gained $65.70 or 5.90%. This, from a March 31st close that I pegged as going out like a lamb.

The U.S. Dollar Index slid below its early-afternoon range, but recovered late in the session to get back within that confine. Taking a spill at 2:10 PM ET, it drifted down to 80.8 before a slight capitulatory drop put it back on a rising track. For the end of the week, it closed at 81.91.

Its daily chart, from, shows yesterday's slump continuing today:

The most likely explanantion is the EU/IMF bailout package being discounted. Now that the anxiety is draining, there's less reason to hold on to the greenback and more reason to take a profit. If those two institutions get the package ready for Monday, the slump in the Index will likely continue. Fear-trade players will continue to cash in their chips, and other players will see the Euro as something other than a train wreck.

Turning to gold, its daily chart shows the indecisiveness of the previous two sessions being resolved firmly on the bull side:

I have to admit my skepticism about the MACD lines' flip to a bullish configuration proved to be unfounded. Those lines, found at the bottom of the chart, are now in a solidly bullish pattern. As it turned out, the quick flip from a bearish configuration was a genuine sign of strength.

Long-term, gold is still in a bull market. Given the action since early February, though, the question needs to be asked: is the gold bull waking up? Was March 25th's short-term bottom the end of an intermediate-term trading range and the beginning of a new bull run? Is the range-boundedness of gold now over, to be replaced by an advance to a new record high in U.S. dollar terms?

Right now, the question is easy to answer with a "yes." After all, the initial part of the advance was unusually strong and sustained. The subsequent pullback left gold at a significantly higher level than it was at as of the beginning of the advance. The next leg up has been less strong, but it's not exactly muted. And - an important point - the credulous were on board for the beginning of the run.

There's only two kinds of advances that fit this pattern after a decline like December-to-February's. It's either a new advance, one that fooled the skeptical pros, or it's a sucker rally. There are three reasons why I believe it's not the latter.

First of all, sucker rallies tend to top out at around the half-way point between the low and the high. The Dec. 2nd high was around $1,225; the Feb. 5th low was around $1,045. There's $180 between them. From the low, today's close of around $1,180 retraced $135 of that $180, or about 75%. It's gone too far to be a sucker rally.

Secondly, sucker rallies begin with a widespread "whoopie!" The rally that began on March 25th began in a climate of fear and skepticism. No-one, except for the usual suspects, was willing to stick his/her neck out and say that the good times were rolling again. And, none of the usual gang of permabulls stuck his/her neck out in the short term.

Thirdly, the market already had a sucker rally. It took place between the December 22nd low and the January 11th high, when more than a few were writing off the December spill as a mere interruption of late '09's run. Unlike at the end of March, there were some people willing to stick their necks out on a short-term basis and call for a new record high. That sucker rally collapsed when the People's Bank of China announced its first tightening measure; that collapse prefaced the second stage of the decline.

By process of elimination, I have to say that a new rally began last March 25th. I don't know how far it will go, and I certainly can't predict how many bumps it will have, but I can say that the bull is back. The action over the last month is not only inconsistent with a sucker's rally but also with a trading-range upswing. The most logical ceiling for said range, $1,140, was broken some time ago. So, I conclude that it's an intermediate-term bull run.

The Commitment of Traders graph for the gold contract, which captures positions as of last Tuesday, shows the open interest for the contract is now at a year's high. After a dip last week, non-commercial longs sprung back to above the level they were at as of two Tuesdays before last. Interestingly, commerical longs also went up and non-commercial shorts shrunk. These three items are consistent with the more jaded circuit jumping on board with the naifs for the rally. Gold stalled last Wednesday and yesterday, but of course continued upwards today.

The CoT for the U.S. Dollar Index shows a growth in open interest, but only to the level of two weeks ago. All four reportable categories expanded: commerical and non-commercial longs, and commercial plus non-commercial shorts. For an asset about to make an eleven-month record the next day, the total open interest was fairly low - and the balance between the four categories, untilted. It's hard to see evidence of a speculative frenzy developing for the Index.

A post-pit Wall Street Journal report pegged the cause of today's rally as continued safe-haven buying. In the opening paragraph, it also mentions that some are talking about new record highs for the metal in U.S. dollar terms.
"We're seeing the safe-haven element of gold, over the last several weeks, continue to play a major role in the move higher," said Dave Meger, director of metals trading at Vision Financial Markets....

"[T]he dollar is a little bit weaker today. So that might have encouraged just a little bit more buying," said Caesar Bryan, GAMCO Gold Fund (GOLDX) portfolio manager....

[M]ostly, it's the worries about sovereign debt--and not moves in currencies--that are the main catalyst driving gold at the moment, Bryan said. In particular, investors are jittery that Greece's problems will be cropping up in other nations.

"There is a feeling that although Greece is small in terms of GNP [gross national product], is it the canary in the coal mine?" Bryan said.

He looks for gold to eventually break its early-December record high, which was $1,227.50 for the benchmark Comex futures. "I don't think these debt issues are going to go away," Bryan said.
The other experts quoted did not say outright that gold was going to a new record.

This week, and month, have been pretty durn good for gold - quite good, given the U.S. dollar's own performance. Naturally, the excitement is coming back; sentiment may be a little too bullish for comfort right now. In the intermediate term, despite any short-term pullbacks, gold's performance has been sufficiently good to say that the range-bound phase has come to an end. This intermediate move may top out at the record high, or near it, but the internals are such that it's safe to say $1,100 is history. There may be more churning in gold's future, and the intermediate move may end next month because of seasonal factors, but any summer churning is likely to stay in the upper 1100s.

The only glitch is the seasonality one: "Sell in May and go away/Don't come back 'til November's day." If this script is followed, the the metal will pull back in late spring and spend the summer in the doldrums.

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