Gold Leaps Above $1,150, Fails To Stay There

A tip of the hat to Commerzbank's technical analysis department, which got it right back at the end of last month. Gold did reach $1,145, and more, today: for a moment, it almost touched $1,150. This, despite the greenback not falling all that much.

When regular trading opened, the metal was indecisive. That indecision changed into a solid rally just after 9:00 AM ET. Although laboured in the middle, it was bracketed by two solid runs that, all told, took the price up to $1,149.30 by 10:30. After that peak, gold fell back to $1,144 but stayed above that level for the next forty-five minutes; after which, it began to inch up again. As of 11:49 AM, the spot price was $1,146.60 for a gain of $12.30 on the day. The Kitco Gold Index attributed -$3.20 to a strengthening greenback and +$15.50 to predominant buying.

In contradistinction to that rallying, the U.S. Dollar Index drifted down but not by that much. Peaking as of 8:25 above 81.7, the Index slid down a little before an attempted return to the same level. That attempt fizzled as of 9:05, with the Index topping at only a little above 81.7, and it began to fall more sustainably. It didn't reach 81.5, though, and the next reaction starting at 10:30 pulled it up to the 81.65 level before a gentle slump resumed. As of 11:50, the Index was at 81.57 - still well above 81.5.

Especially in the teeth of a mostly stable U.S. dollar, gold's performance these last five trading days has been veritiably incredible. We're now at a point where a sustained drop in the greenback is not necessary for a sustained rise in gold. It may not last, but it's certainly enjoyable while it has. The afternoon's trading will show if the metal can add to its already substantial gains.


Update: It has, and in the process the metal surmounted $1,150. This morning's already substantial gains are turning into a minor buying frenzy. Ben Bernanke's recent cautious speech, in which he said that the U.S. economy's not out of the woods yet, helped add to the push. His focus upon the housing market and unemployment rate suggests that the near-zero interest rate policy isn't going to be ended soon.

After dawdling just above $1,146 until 11:50, gold vaulted up to $1,152 before establishing a trading range between $1,150 and that level. Staying inside until 12:45, the metal took another leap up that briefly put it at $1,154.40. That last rise blunted, gold established a less well-defined range centered around $1,152. As of 1:56 PM ET, the metal was at $1,152.50 for a gain of $18.00 on the day. The Kitco Gold Index assigned -$1.25 to the strengthening-greenback category and +$19.25 to the predominant-buying one. Added together, the two equal the daily gain.

Desite that overall strengthening, the U.S. Dollar Index has continued to weaken from its earlier daily high. After peaking at 81.65, the Index has made a rolling series of slightly lower lows that took it down to below 81.5. As of 1:58 PM, it was at 81.435.

Now that gold has continued its run to well above the $1,140 resistance level, the question almost begs itself: has gold finally surmounted the trading range that's kept it below $1,140? More immediately, will $1,150 hold? For the latter, despite gold's tear being a long one, there's a likelihood that it will. The rest of the afternoon's session will show if it does.


Update 2: $1,150 didn't hold, but it was close. Except for a brief interval, $1,148 did.

After continuing in that trading range, centered at $1,152, gold dropped to $1,150 at 2:20 PM ET and stayed around that level until just after 3:05. Another drop hit the price at that time; it carried gold down to $1,148 and briefly below. Recovering to that level, the metal established a trading range with an $1,150 ceiling that lasted for the rest of the session. As of the close, spot gold was at $1,148.00 for a gain of $13.70 on the day. The Kitco Gold Index (KGX) attributed -$3.60 to strength in the greenback and an unusually high +$17.30 for predominant buying. The KGX itself, which measures gold's performance ex-greenback, hit another record closing high today. Had it not been for continued U.S. dollar strength...

Speaking of the greenback, the U.S. Dollar Index put on a bit of a rally in later-afternoon trading. Its early-afternoon slide bottomed as of 2:55 with the Index touching 81.40. Subsequently, it rallied smartly and then more slowly, with the rally being stretched by a one-hour trading range centered around 81.57. The post-intermission advance took the Index up to 81.645 by 5:10: a level that was the best for the afternoon but below the morning's highs. As of 5:30 PM, it was at 81.61.

The daily chart, from Stockcharts.com, shows a continued recovery from the Index's recently depressed levels:



Not counting Monday, it's been the second day in a row that the Index has rallied. It's a somewhat tepid one, but there's been no crisis driver to push it into takeoff mode. I note that the recent bottom of the RSI line at the top of the chart was around 50, which is consistent with an asset that's still in a bull trend. The 81.5 resistance level was surmounted rather easily today.

The MACD lines at the bottom, however, are still in a bearish configuration. Barely, but they're there. They also show a large divergence: back on February 23rd, both of them were much higher than they were as of March 25th, when the Index itself was much lower. This kind of divergence, to technical analysts, says that the Index's rise is questionable. So far, the current short-term rally is acting well. A technician, though, would wait for a new 82+ high to wash away that MACD-divergence blot before declaring the uptrend intact. If the Index should fall below 81.5 tomorrow, the picture would become more ambiguous.

Today was another day where the Index rallied concurrently with gold. Unlike yesterday's, today's rally in the metal was a strong one. The daily chart for gold shows a possible important breakout from the $1,060-$1,140 range:



I say "possible" because gold surmounted the $1,140 level on January 11th but fell back below on the 12th. A lesser poke-up on the 14th also came to naught the next day. I admit to being skeptical of this entire rally, but that's because I've been keeping the U.S. Dollar Index in mind. Perhaps the recent fall below $1,100 put me in a defensive cast of mind.

The chief difference between the rally over the last five trading sessions and the one from the beginning of this year is the earlier one was more laboured. There were two stops and starts along the way. This one has had five straight trading days of gains. There's another difference that pertains to the RSI line at the top: today's value is higher than the one for the Jan. 11th top, even though the value for gold itself is a little lower. That's a postive divergence, one shared by the MACD lines at the bottom.

Speaking of the MACDs, that indicator had it right for this rally. Their crossover to a bullish configuration at the beginning of this month did signal a real uptrend that developed a fair bit of steam.

The chart is certainly praiseworthy, but there's still a nagging question: has the rally gone too far, too fast? Gold may be good for a sixth day of gains, but the trend has to reach the oversold level sometime. What would be more indicative of gold's strength is its performance once the rally runs out of gas. There was a similar rally that spanned the end of February and the beginning of March, but gold pulled back almost all the way back down in early March. If a decline sets in that takes gold to down $1,125 or higher, then we'll be looking at an $1,140 resistance level that's on its way to being sustainably surmounted.

A better acid test would be a fundamental challenge, of the kind that had knocked down gold in the past. If, say, the People's Bank of China raises rates and drains liquidity from the mainland Chinese economy, gold shrugging it off would be a solid sign that the rally has been real. It's true that the metal has rallied in spite of relative U.S. Dollar Index strength, but previous rallies of that sort have opened up air pockets leading to plummets. A more solid ignore-the-bad-news test would be more reassuring. I don't want to fall into the stopped-clock track, but part of the frustration for gold players this year have been those recurring encouragements followed by letdowns.

The regular Reuters report for the end of the pit session ascribed today's gain to safe-haven demand provoked by the Greek govenment's woes. Amongst other points, these were made:

* Active trading by commodity funds led to increase in open interest in June contracts - George Gero at RBC.

* Gold on track to rise for a fifth straight session despite euro's drop on Tuesday. Gold in euro terms rallied to a record peak 858.98.

* The euro dropped against the dollar to its lowest in more than a week on renewed concerns about Greece.

* Rising U.S. interest rates signal economic recovery, bolstering gold's investment appeal - traders.

That last point may be whistling in the wind, but it does hint at the gold market taking a future Fed Funds rate in stride. If so, although it's a long shot right now, then confirmation of a new bull trend would be put into place. As of now, that last point can be pointed to as a harbinger of a sentiment change - one that may prove true but may not.

Moving to less hypothetical territory, gold might eke out a sixth gain in a row tomorrow. If so, then it's not likely to be a big one. To repeat, what gold does when it pulls back will be a more important indicator of whether or not the $1,060-$1,140 trading range becomes history.