Gold Shifts To Gain As Safe-Haven Rise Extends

Some of the earlier pullback in gold took place in overnight trading, although it did continue at the beginning of today's pit shift. From $1,165.50, the metal fell to $1,161 in the first five minutes of regular trading. A recovery from that level took gold up to $1,166 by 9:30 AM ET before another decline hit it. Ending just after 10:00, that drop pushed gold down to $1,159.80. Overall, a trading range between $1,160 and $1,165 carved out in the overnight session held until that time.

Then, like it did at 10:00 AM yesterday, gold began taking off. More muted than yesterday's rocket-up, the uptrend took the metal up to a gain on the day. At first a slight gain, it turned into a substantial one as late morning headed towards afternoon. As of 11:31 AM, spot gold was $1,173.90 for a gain of $5.50 on the day. The Kitco Gold Index's predominant-buying category shifted from negative to positive, to +$8.30, and the greenback category shifted to -$2.80 for renewed strength in the currency.

Like gold, the U.S. Dollar Index ralled in regular-session morning trading. Starting just before 9:00 at just above 82, the Index moved up to the 82.35-82.4 level by 10:00. Pausing and then pulling back, it spurted up to a new high of 82.62 just before 11:30. Subsequently, after pulling back a little, it hovered indecisively before pulling back up. As of 11:43, it was at 82.61.

Although more muted, the same concurrence still exists between gold and the greenback. Breaking to $1,174 did make for a new 2010 interday high, although only slightly higher than yesterday's. It's up to the afternoon session to make a substantial break if one is coming.


Update: A new 2010 high was made interday, but the metal pulled back from it. $1,170 held, but the metal got close to that level as the pit shift ended. A Standard and Poor's downgrade of Spanish sovereign debt from AA+ to AA helped push gold up to its high.

The high of $1,175.70 was made around 11:45 AM ET. After a pullback from it, gold stayed in a range bordered by $1,174 and $1,172. Although tested on the downside, it wasn't broken until 1:00 PM; the metal slid down to a lower one centered at just above $1,171. As of 1:43 PM, the spot price was $1,171.50 for a lessened gain of $3.10 on the day. The Kitco Gold Index attributed +$4.90 to predominant buying and -$1.80 to a strengthening greenback.

A similar pullback took the U.S. Dollar Index down from its morning peak, above 82.70 right around noon, to below 82.5. That drop took place over the next hour. Since then, it partially recovered to get comfortably above 82.5. As of 1:45 PM, the Index was at 82.54.

Unless there's a bullish surprise coming at the end of the Fed meeting, which is unlikely, gold will continue to drift. There's a good chance of a day's gain, but that gain is likely to be slight.


Update 2: As it turned out, I was too optimistic about the later part of afternoon trading. Instead of drifting, gold fell down fairly steadily. There weren't any surprises from the Fed this afternoon; the Fed Funds rates is still where it is, and it's staying where it is for an extended period. Nevertheless, the metal fell below not only $1,170 but also yesterday's close. Profit-taking took its toll.

$1,170 was breached on the downside just before 2:00 PM ET. After reaching $1,168, the metal drifted in a ragged trading range centered at $1,169. The stay-the-course announcement by the Fed had next to no impact on the price. After getting up to $1,170 by 3:00 and hovering there for almost half an hour, the price slumped to a little below $1,168 and drifted until 4:40. Then, an end-of-session drop took the metal down to its closing price of $1,165.00; the day's loss was $3.40. The Kitco Gold Index assigned -$5.60 to predominant selling, reversing the earlier predominant buying, and +$2.20 to a weakening greenback, also a reversal from earlier in the day.

The U.S. Dollar Index did show weakness in the later part of the afternoon, in a downtrend that was barely interrupted by relief rallies. From above 82.5, it slumped down to below 82.2 by 4:45 PM. The Index did pull up to 82.25 afterwards, but rather listlessly. As of 5:30, it was at 82.235.
Its daily chart, from Stockcharts.com, shows the Index jumping to a level not seen since last May:



The range of today's trading is rather wide, even though the difference between the open and close is quite narrow. The performance of the Index itself shows that the bullish phase is still operative, and is likely to be unless things calm down in Euroland. Angela Merkel was quoted today as saying the talks should be hurried up; should a bailout package be put together and activated, the Index may pull back as the Euro recovers.

It's not going to happen overnight, however. The Index may have a bit of life left in its current run upwards, which would show in tomorrow's trading.

As far as gold is concerned, its own daily chart shows its slump near the end of the day as well as its new 2010 interday high:



The difference between opening and closing values wasn't that much, but today's slump was still evident. The MACD lines at the bottom of the chart are still in a bullish configuration, although slightly - just as they were in a bearish configuration from the 19th 'til last Monday, although slightly. The formulas for both are exponential moving averages; their values are completely based upon market internals. Sometimes, the luck of the draw will have them fluctuate so that their difference is effectively zero, making them neutral in effect if not in form. I think the gold MACD lines are in a phase like that right now, where their fluctutations make for a little whipsawing. If gold pulls back further tomorrow, then the lines are likely to move back into a bearish configuration. Given gold's recovery from the sub-$1,135 level, and given its new 2010 high, any bearish MACD signal tomorrow wouldn't provide that much meaningful direction unless gold itself fell well below $1,160.

I know I was a little optimistic yesterday evening, but the optimism was justified as of early afternoon. Unfortunately for me, the late-morning rally didn't last. What did last was the positive correlation between gold and the greenback, both ways. Again, both benefitted from the latest proceedings in the Eurocrisis. Eyes are on Portugal and Spain, although neither of the two countries have shown any sovereign-debt squeeze like Greece has. As yet, anyways.

Moving back to Greece, a Reuters piece warns of another side effect of the Grecian mess: a possible credit squeeze on Grecian banks. They hold a lot of Grecian government debt, which has plummeted in price recently. That means losses and capital impairments, even if those banks aren't answerable to mark-to-market rules: a restructuring will impel them to write off a portion of the value of their holdings. Enough impairments of capital and the banks will have trouble raising money for their own credit needs. Most banks, wherever located, run on a credit shoestring and would be in real trouble if they're downgraded. [Isn't modernity wonderful?] There's

rising worry among analysts that Greece may restructure its debt.

If this last possibility happened, it would be a major blow to Greek banks, which hold around 40 billion euros in debt on their books, and raise the specter of capital hikes in a market that has seen foreign investors flee as the debt crisis intensifies.

Analysts agree the Greek banking sector is relatively well capitalized and has a comparatively low loan-to-deposit ratio, and they are not yet predicting a banking crisis.

But the crux of the issue remains whether a multi-billion-euro aid package Athens is trying to secure from euro zone states and the International Monetary Fund will tide it over long enough to cut a bloated public sector and tackle a 300 billion euro debt pile....

"If the situation really deteriorates sharply and with it systemic risk for the Greek bank sector, I don't think the Greek government has any money left to support that or any other sector of the economy," said Diego Iscaro, a senior economist for IHS Global insight.

As of now, this possibility is one for the worry file. Deposits in Grecian banks have shrunk, although not at bank-run rates. Those deposits are guaranteed all right...by the Grecian government. Needless to say, the gurantor has been having a little trouble meeting its own obligations lately.

Yes, Euroland is providing a fair bit of grist for the worry mill. The resultant worries may benefit gold further tomorrow, even though the profit-taking may extend from this afternoon 'til then. The only real worry for gold would be a Fed rate hike, which isn't in the cards right now; the Fed today made that plain.