Thursday, May 6, 2010

After Hesitation, Gold Rockets Up; Closes Well Above $1,200

As of late morning, gold made it well above $1,190. As is becoming more common, the beginning of regular trading featured a decline that proved to be misleading. Declining from $1,182 to below $1,176, gold reversed course at 8:50. Initially vacillating, the metal rallied with little hesitation until it reached above $1,187 a little after 10:20. Then stumbling, it fell to $1,182 before rising hesitently at first. That tentativeness turned into a solid rally which peaked at $1,192.50 before pulling back. As of 11:58, the spot price was $1,195.90 for a gain of $19.30 on the day. The Kitco Gold Index attributed -$8.40's worth of change to strength in the greenback and +$28.30' worth to predominant buying.

The U.S. Dollar Index, after wobbling early on in the session, climbed itself. Advancing to almost 84.65, it dropped swiftly from 9:23 to 10:04; that dropped dragged the Index down to below 84.3. Recovering, it sailed back up to 84.65 before rising more hesitantly. But, rise it did in late morning; as of 11:50, after peaking at 84.8, it was at 84.72.

The fear trade is still two-tracked, with gold returning to rise in rough concurrence with the greenback. Gold is on track to chalking up a solid double-digit gain for the day...and $1,200 is awfully close.

Update: It took a couple of bounces and weaves, but gold has made a 2010 milestone. Right around the end of the pit shift, just before 1:25 PM ET, gold got above $1,200. It peaked at only 30 cents above that price, and has since pulled back, but the metal still made it. $1,200 gold is now in the books for 2010.

After dawdling around $1,190 from 11:35 to 11:50, gold shot up to above $1,196 before pulling back to $1,193. A second run ended near the same high and low. It wasn't until the run at 1:00, which moved fairly slowly, that gold managed to peak at its new 2010 record. The subsequent fallback only subtracted a few dollars an ounce, which left the metal with more than a twenty dollar gain on the day. As of 1:55 PM, the spot price was $1,196.50 for a gain of $20.90 on the day. The Kitco Gold Index assigned $27.60 to predominant buying and -$6.70 to strength in the greenback.

The U.S. Dollar Index gave up some of its strength after approaching 85. Sinking down to below 84.5 by 12:30, it turned up and sunk slightly lower before getting on the recovery track again. As of 1:56, it was at 84.74.

The pit session has turned into electronic trading, which is likely to pull gold down a bit. That's what tends to happen after a blazing run like today's was. Still, the metal is almost certain to clock in with a double-digit gain. It's just not likely to keep a $20+ gain.

Special Update: That scenario was thrown for a loop when the stock market went into an auto-catalytic plummet, which bottomed with about 9% losses for the three major averages. From a downward slide, gold got a kick upwards as the fear-trade money flowed in. Of special significance was the fact that gold went up while the stock market was collapsing. In previous routs, gold went down as traders liquidated assets to pile in to the greenback and U.S Treasury securities. Despite the unsustainability of the rally, today was a game-changer for the metal.

Gold peaked at the height of the rout, at $1,209.90 - about fifteen dollars away from its all-time high. Now that the market's settled, the metal's sinking down again. As of 3:13 PM, it sunk back below $1,200.

Update 2: The dip below $1,200 didn't last long. Although the market averages shaved more than half of their interday losses off, returning a semblance of calm to a day that looked for a time like it would gestate an all-out crash, gold still returned to near its interday high in the rest of the electronic-trading shift in the regular session.

Supposedly, a trader's glitch caused the 2:00-2:45 selloff; the latest word is that someone entered "billion" when "million" was meant for a sell order. Stories conflict about whether it was S&P eMini futures or Proctor and Gamble stock that was the security on the purported poison sell ticket. Whatever the trigger, it can be said that the stock market was vulnerable to a downswing anyway. As the market was being routed, live TV was showing protestors and rioters on the streets of Athens as the Grecian parliament passed the austerity package.

As noted in the special update just above, this day was a game-changer for gold. Instead of the later-afternoon scenario I expected, which was in the midst of taking place pre-rout, gold shot up to well above $1,200. This day made it clear that the concurrency effect is still with the gold market when panic descends. There were three asset classes that went up when the stock market was plummeting: the U.S. dollar, U.S. Treasury securities, and gold. Granted that the three make for somewhere between a mixed bag and an inducer of cognitive dissonance, theoretically speaking, but the fact that gold has joined the panic party speaks of a transition. When liquidation time comes, gold is no longer just one of the assets to be liquidated. The metal may have been pushed up by risk appetite in the near past, and has been pushed down by the panic trade in the near past, but it was not today except initially and briefly. Today, U.S. traders joined their European brethren in seeking safety in gold. It's been long anticipated, but was only made real today.

Adding to the game-changing nature of the day is the fact that gold closed at a price that was less than two dollars below the height it reached at 2:45. The U.S. Dollar Index lost most of its rout-related gains by the time the market closed. Gold, on the other hand, went on to a new daily high. Its peak at the height of the aborted crash was lower than its $1,212.60 peak as of 4 PM ET, which was its interday high of the day.

When the pit shift ended at 1:30, gold initially marked time; then, it slipped a bit before rallying up again to $1,200. Stuck there between 2:05 and 2:15, the metal took a tumble; by 2:25, it has sunk to $1,190. An initial upthrust came to naught, until at about 2:35. Then, the metal rocketed up to well above $1,200. After a brief pullback, the metal continued to reach the above-mentoned $1,209.90 as of 2:50 PM. I note that, when the 2 o'clock rout got started, gold was sold off like any other risk asset. It wasn't until outright panic set in that gold took off. So, the fear jump wasn't automatic; it took a little time to get rolling. A "mere" stock-market selloff did push it down until the panic point was reached.

The metal then fell back as the panic eased, to $1,198, but it began spiralling upwards until it calmed down after the stock markets closed. With them shut, the metal coasted up to its closing price of $1,208.80; the day's gain was +$33.20. The Kitco Gold Index (KGX) attributed a huge +$41.90 to the predominant-buying category and -$8.70 to the strengthening-dollar category. Both categories sum up to the raw change on the day. The KGX, tracking gold ex-dollar, not only set another record closing high today but also reached a milestone of its own: it closed above 1,000. Well above 1,000.

As noted above, the U.S. Dollar Index shot up too when the market began collapsing, although it began its run earlier than gold did. Until 2:30 PM, the advantage was with the greenback and not gold. As of 2:05, the Index had already risen from 1:30's 84.56 to 84.83. The rise continued smoothly until it hit its peak of 85.275 between 2:40 and 2:45. Falling back below 85, the Index spiked slightly above that level as of 3:30 but failed to hold; by 3:50, it was below 84.75. Pulling up into a trading range between 84.8 and 84.95, the Index briefly sunk below before recovering. As of 5:30, it was on the rise again at 84.91.

Its daily chart, from, shows the entire day's rally - one that took the Index up to a new high for the year:

Today marks the fourth day in a row of strong gains in the Index. Just like Tuesday's, today's action saw the Index close the pit session at the daily high. The time of closing did not capture the rise to above 85.25. Still, even at the closing level depicted above, the Index closed higher than it has been this past twelve months. It finally joined dollar/euro in making a yearly high.

As can be expected, its RSI line at the top of the chart shows that it's also at the most overbought level since late October of 2008. That's not the highest it's been in the last two years; the RSI was well above 80 in early August of that year. Beyond noting this point, I can't comment. Even being blisteringly overbought is no barrier to further advances in a buying panic. To be honest, I have no idea how much higher the Index will go; it's in the hands of the crisis god. Suffice it to say that, if a reaction comes, it'll be swift and brutal but likely short-lived as long as the crisis continues.

As for gold, its own daily chart shows today's gain as being the largest daily leap in the last six months. Yes, that includes November:

In fact, it might as well be the reverse of February 4th's plummet. For the first time since December 2nd's peak, gold's RSI rose into above-70 oversold territory. Speaking of December, today's close was above December 3rd's. The only day which saw a higher closing value for gold - ever - was that same December 2nd. It would only take one more strong rally day for gold, in U.S. dollars, to join gold in Euros, pounds and Swiss francs in making a record high.

That said, there's no guarantee that the metal will make that level. The momentum generated today was stunning, but it might not even be followed by a gain at all tomorrow. Today was only the second rally day in a row, so gold hasn't gone into full-scale buying-panic mode. Until or unless it does, I have to stay the wet blanket by reminding everyone that it's quite overbought at this point. It's also well above any bargain point; the only demand that can be counted on is momentum demand, which is fickle.

Whatever the metal path tomorrow, it won't change the fact that gold is a genuine safe haven again. It hasn't elbowed the greenback out, but it has nudged its way in.

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