Thursday, May 13, 2010

After Drifting, Gold Goes Up

The metal just won't quit. After an initial run upwards which began before regular trading opened, gold drifted around the $1,238 level until 11:00 AM ET. In a range between $1,236 and $1,240 from the start of the pit shift, which narrowed to a drift right around $1,238, the metal rose above $1,240 to make a new daily high of $1,244.30. As of 11:46, the spot price was $1,242.20 for a gain of $5.10 on the day. The Kitco Gold Index attributed +$9.50 to predominant buying and -$4.40 to a strengthening greenback.

Although less strong then earlier in the morning, the U.S. Dollar Index has shown that strength today by rallying above 85. Reaching above 85.25 as of 9:30 AM, it then drifted down until it bounced off 85 and recovered. As of 11:48 AM, it was at 85.18.

So far, the rise in gold hasn't been that steep - but the usual early-morning catalyst didn't kick in today, so seeing it move up in the pit shift is a little unusual. It may continue going up in the afternoon.

Update: It didn't, at least in the later part of the pit shift. The peak actually came with the above-mentioned daily high. After stabilizing for a short while, gold headed down to $1,232. Subsequent to bobbing above that level, the metal fell through it around 1:00 PM ET. Not stopping until $1,228, it recovered somewhat only to keep falling at the end of the pit shift: 1:30. As of that time, spot gold was $1,228.80 for a loss of $8.30 on the day. The Kitco Gold Index divided the loss into -$5.10 for predominant selling and -$3.20 for strength in the greenback.

The U.S. Dollar Index has fallen too, but only in a drift-down that was close to a trading range. After getting up to 85.22 by 11:55, it pulled back and made its way down to below 85.1. A pull-up at 1:05 only got it to 85.15; two minutes later, it fell below 85.1 again. As of 1:35, it was at 85.03.

At least seemingly, the short-term rally that gold's enjoyed has run out of steam. It would be very surprising if gold turned around enough to sport a gain at the close. However, thanks to a post-pit pull-up, the metal may pare its losses to the low single digits. Despite gold's overboughtedness, the metal isn't ripe for an all-out plummet.

Update 2: That guess, I lucked out on. After a slight rally brought the metal up above $1,132, it closed with a loss of less than five dollars an ounce.

Subsequent to making the day's high around 11:30 AM ET, gold made a daily low of $1,226.60 as of 1:15 PM. The rally that ensued was uneven, but it pulled up the price to $1,234 before halting. An attenpt to get above petered out at $1,235 as of 2:30. Afterwards, the metal traced out a range between $1,132 and a little above $1,134. The close was at the lower end of the range: $1,232.60, for a drop of $4.50 on the day. The Kitco Gold Index (KGX) attributed +$2.90 to predominant buying and -$7.40 to a strengthening greenback. Thanks to the rise in the former component, the KGX had gold ex-greenback at another record high today at its close. The KGX value, less than 1000 as recently as eight days ago, closed at above 1050 today.

The U.S. Dollar Index, after dawdling for an hour after 1:20, took off on a rally that sent it up to a new yearly high - at a level that hasn't been seen since April of last year. Barely pulling back until 4:55, the Index got well above 85.4 before stumbling to below 85.35. After some more hesitancy, it began climbing again to touch 85.45 just before 5:30. As of that time, the Index closed at 85.43.

Its daily chart, from, shows that new high made with momentum firmly im place:

Because the cut-off time for the daily chart is earlier, the number shown as the closing value is less than what I have above. That fact shows that the momentum did continue, making this a strong day. It's also the third day in a row that the Index has gone up, even though the lower wick of today's candlestick bottoms at about the same level that the previous two did. Based upon how the Index has done today, it looks like its run is fording through some skepticism. Still, I have to say that its post-Eurobailout upturn began at near-overbought levels, as indicated by its RSI values at the top of its chart, which makes for a risky rally even if it puts a real stamp of bullishness on the Index. Its latest upturn can be justified as a fairly rational response to the corrosion of the Euro, which gold is benefitting from too.

Still, the frothiness of the Index's ride does leave open the question of what will take place once it's over. The last short-term drop was sudden, but it lasted only two days; at the end, the Index dusted itself off and kept climbing. The next one may take the same course, in which case the corrosion of the Euro is likely to continue. $1.25 isn't that far away. The last time the Euro visited that level, it bounced off in the post-Eurobailout relief rally. Now, it's almost back there. Should the Euro break down below $1.25 and stay down, the upward run in the Index will continue for a fair stretch.

Turning to gold, its own daily chart shows today's pullback leaving gold still in an overbought position:

As noted above, it was the U.S. Dollar Index's turn to make a new high today; gold, after making an all-timer yesterday, didn't. As a sign of momentum, the metal's price is well above its 50-day moving average; it's traced out in blue in the middle of the graph. For perspective's sake, the metal never got below its 200-day moving average, traced out in red, even on the darket day of 2010. Its long-term bull trend, at least by that measure, never went away.

The reason why it's rolled upwards at near-overbought levels is the momentum funds have gotten ahold of the gold theme, as explained in this Kitco interview with John Doody. Those funds tend to accentuate both the rise and the fall, leaving gold vulnerable to a sharp pullback like the one it suffered after making its December 2nd '09 high. There's a possibility of a similar rush to the exits taking place in the near future, but I don't think it's likely as of now. The only driver that could upset the gold market to that extent would be a Fed Funds rate hike, which isn't in the cards anytime soon. But, the rally could collapse of its own weight like late '09's did. All I'll say is that the people who waded in during the new year, when it became fashionable in certain circles to cast the correction as a burst bubble, wound up benefitting. Even if it didn't seem that they would in February.

For the nearer term, I again demur. Rallies when overbought are tricky, and do tend to either drain away or collapse of their own weight through essentially intermal factors. Any such decline will serve as a test for the intermediate status of gold: if one hits that still leaves the metal over $1,200 when the dust settles, then gold's intermediate-term bull run will not be over. Anything above $1,180 would, and above $1,160 would still be arguable.

The post-pit Wall Street Journal report pegs today's pullback as a "'tame correction'," as the above-mentioned momentum funds and other short-term players aren't running out.
"There's no exiting of existing positions," said Bob Haberkorn, senior market strategist in Chicago with Lind-Waldock.

Rather, short-term traders are selling to make a quick buck, but they're ready to come right back in and buy.

The consolidation may end up helping the metal maintain overall gains. When markets rise too far too fast, "you generally don't hold those gains," said Frank Lesh, broker and futures analyst with FuturePath Trading in Chicago.
So, if the market is going to break down, there's no hint of it doing so yet - not even nervousness.

That suggests gold will not be mauled tomorrow. Although the trend can change on the proverbial dime, the dime isn't visible as yet.

Last December 2nd, the top of the run to then-record levels was marked by Barrick closing its hedge book. At that time, selling on the news ended up cascading into an all-out correction. Should the current run-up continue in the near future, that's what to watch for: an exciting and "obviously" bullish event that ends up triggering catalytic selling. Of course, there's no inevitability to that kind of avalanche decline taking place; if it does, however, it would fit the "sell in May and go away" script. Gold is holding up, but at nosebleed levels still.

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