Morning Spill Fails To Drive Gold Into Loss Column

After an initial rise, gold was beset by one of those morning declines, but the metal was still in the gain column even at the climax of said drop. After a false start, the metal recovered almost all of its loss in late morning trading.

The day began fairly well for the metal, with it fluctauating between $1,159 and more than $1,161. Starting at 8:45 AM ET, though, a decline set in that took about eight dollars an ounce off by 9:50. Fluctuating around $1,154, gold dipped down below between 10:00 and 10:15. A run just before 10:30 put more than three dollars on the price, but it fizzled; the metal wound up making a daily low of $1,151.20 just before 11:00. Since then, the metal rocketed up to ascend above $1,160 again before pulling back somewhat. As of 11:50 AM ET, spot gold was at $1,157.80 for a gain of $6.70 on the day. The Kitco Gold Index divided the gain into +$2.20 due to predominant buying and +$4.50 due to a weakening greenback.

The U.S. Dollar Index did continue to weaken, although it didn't sink to 80. A downward drift ending at 9:05 was replaced by an upwards drift that took the Index up to 80.47 by 10:15. Subsequently, it began to fall steadily until 11:40, at which point it was below 80.1. Since that bottom, the Index drifted directionlessly. As of 12:00 PM, it was at 80.10.

Afternoon trading may be pockmarked, but there's a good likelihood that gold will close with a modest gain on the day.


Update: The early-afternoon session saw gold sagging a bit. A two-stage drop down to $1,157 ended around 12:25, which was followed by another rally up to the $1,160 level. Unlike the last one in late morning, this attempt didn't breach the level. After topping at $1,160, the metal underwent a gentler decline that took the price down to $1,158. As of 1:31 PM ET, spot gold was at $1158.90 for a gain of $7.80 on the day. The Kitco Gold Index split the gain into $3.85 for predominant buying and $3.95 for a weakening greenback.

The U.S. Dollar Index went almost nowhere in the same timeframe. Although trading since noon shows a slight upward direction, it resembled a trading range in that the Index wasn't able to get above 80.15. The first attempt prefaced the establishment of a real (and tight) one between that same 80.15 and 80.1. As of 1:39, the Index was at 80.14.

There isn't much to drive gold right now, and the later afternoon session typically doesn't hold much excitement. The fix ain't in, but the chances look better for gold to post a gain at the close.


Update 2: It did, but not by much of one. The early-afternoon weakness continued until late afternoon, when the dropping stopped.

The third and final leg of the afternoon downturn started after gold pulled up from $1,156.50 to just above $1,158 between 2:00 and 2:40 PM ET. In the next forty minutes, the metal lost five dollars an ounce before the decline came to a halt. The uptrend that followed could be described as a relief rally; it was good for little more than three dollars per ounce, and was partially reversed in the last half-hour of the regular session. At the close, spot gold was at $1,154.80 for a gain of $3.70 on the day. The Kitco Gold Index divvied up the gain into $0.60 for predominant buying and $3.10 for greenback weakness.

The U.S. Dollar Index, although closing down on the day, did recover somewhat from its earlier lows. That tight trading range it was in was broken, although slightly, on the upside until 3:00, when it was broken definitively. The upsurge wasn't much, though; the Index didn't make even 80.25 at its height. After that spurt, and pulback, it drifted slightly upwards while failing to crack a new afternoon high. As of 5:30 PM, it was at 80.205.

The Index's daily chart, from Stockcharts.com, shows a significant decline but one that failed to do more than touch the significant 80 level:



I have to say that things aren't looking very good for the greenback right now. It's been three days since its plummet last Friday, and at least one of them has been a down day - possibly two. Both the open and the close today were below the Index's 50-day moving average, something that has not occurred since December 4th's rocket-up early on in its bull phase. Of course, the 50-day (traced out in blue in the middle of the graph) is much higher than it was in early December.

Nevertheless, the Index had managed to outpace it for more than five months. Although it's too early to jump on the bear train, it can be said that the current rally is tired. The post-Eurocrisis hangover, for this iteration of it, has had the effect of draining away almost all of the crisis premium from the greenback. Given how crisies go, it's unlikely that another iteration will erupt - regardless of how close any other country is to the tipping point - until complacency over the "solved" Grecian debt snarl settles into the EU seats of power. That's how it happened in '08, when Lehman was allowed to fail in large part because of the market's shrugging-off of the Bear, Stearns debacle. We're not there yet in Euroland.

The MACD lines on the bottom of the Index's chart are solidly bearish, so much so that there's a fair bit of leeway for a relief rally to develop without interrupting the configuration. Regarding their absolute level, I'd like to point out a divergence that's developed: both lines are lower than they were as of January 14th, while the Index itself is much higher than Jan. 14th's 76.7. The same divergence exists for the RSI line at the top: today's the RSI level is slightly lower than it was as of Jan. 14th.

According to chartist theory, those divergences are a bad sign for the Index; they point to the raw value dropping in the weeks ahead, or at least a higher risk of it doing so. As a strict matter of market internals, both say that the Index's are worse than they were back in mid-January when the short-term decline back then turned into a continued rise. The Index has ascended a fair bit since then, but its recent performance has been tired rather than chipper. The momentum that's developed over the last four months is being drained from the Index's performance. Next to go, should its current difficulties continue, would be the 50-day moving average falling.

To repeat, it's too early to say whether the bull trend is being reversed...but it's thinkable.

Turning to gold, its own chart shows today's modest rally that basically reversed yesterday's decline:



Gold was higher earlier in the day, indicating headwinds that it still has to face, but so far the correction has been orderly. Based upon its action in the last several months, from internals alone it looks like any further declines are going to be part of a downward slog. That guess of mine would be obviated by any bearish driver that appears over the horizon, as it would by the appearance of any bullish driver, but the morning tests of gold have not led to any waterfall plummet despite the high level the metal ascended to recently. Gold holders' hands seem to be stronger nowadays. From an internals standpoint, there's less reason to be fearful (or hopeful, if a bargain-hunter.)

The weakening greenback was the cause highlighted by a Bloomberg report webbed by Business Week, which also notes that palladium scooped the thunder today.

The greenback fell against a basket of six major currencies for a fourth straight session, and the Reuters/Jefferies CRB Index of 19 raw materials advanced. Global equities also gained. Gold may climb to a record [of $1,300] late this year or in early 2011, [and then turn bearish,] said GFMS Ltd., a research company in London.

“What you’re seeing is a macro move up in all commodity markets,” said Adam Klopfenstein, a senior market strategist at Lind-Waldock, a broker in Chicago. “The weaker dollar, coupled with a wave of economic optimism, is supporting every commodity.”

In other words, gold is going along for the ride right now. Another trader quoted in the article has this optimistic take:

“The path of least resistance for gold still remains higher,” said Matt Zeman, a metal trader at LaSalle Futures Group in Chicago. “This is a market that people still like on the long side. We had bargain hunters come in after yesterday’s moderate sell-off.”

This take speaks to the internals point I raised above, which do show a weatheredness that wasn't there earlier this year (particularly in February.) I can confirm that traders' skittishness has lessened.

Regarding tomorrow, gold's been indeterminate enough to make it a guess as to what will happen. Myself, I believe that the pullback isn't over and gold has still some room to decline further - but I also believe that the short-term bottom will be well above $1,100. Someone more optimistic than myself may think that today's small rally indicates that the short-term pullback is over, even though the Eurocrisis-related demand for the metal seems to have faded for the nonce. As always, the market itself will make it clear.