Wednesday, May 5, 2010

After Spill, Gold Rebounds

This morning's regular-trading action in gold, both down and up, was driven by the U.S. dollar. After an initial rise up to $1,175, the metal at first dipped and then plunged. The catalyst was a slew of mostly job-related U.S. economic data that shows a slowly healing job market. The news got the metal down to $1,170 right after 8:30. After a relief rally, the metal dropped from $1,171 to $1,156.20 between 8:45 AM ET and 9:15.

Then, after another relief rally led to the metal bottoming at a higher price, gold went on a real rally starting right after 9:35. From a little below $1,158, the metal soared up to $1,176.90 before pulling back to just above $1,170. A pull-up to a little below the same level petered out, leaving the metal near the $1,172 level. The loss earlier today was erased. As of 12:00 AM ET, the spot price was $1,175.00 for a gain of $2.80. The Kitco Gold Index attributed -$4.40 to strentgh in the greenback and +$7.20 to predominant buying.

As mentioned above, the U.S. Dollar Index was the big influence today. Egged on in part by the above-mentioned economic data, it had rocketed up to 84.3 by 9:16 AM. Since then, it tailed off. Sinking below 84 just before 10:00, it bounced off 83.9 while trying unsuccessfully to surmount 84.05. As of 11:38, it dropped below 83.9 and continued to sink; as of 12:01, it was at 83.77.

As the timelines make clear, the greenback was the force that humbled gold earlier today. When the currency itself was humbled, the metal rose back. The afternoon part of the session will show if gold can hold its gains, which would be an encouraging sign.

Update: At the end of the pit shift, gold held on to a gain. After peaking at $1,178.30 just before noon ET, the metal pulled back only to rally to a lower top at just above $1,176. From that point, it descended to a trading range between $1,174 and $1,172. After a brief drop below at 12:45, gold regained that range; starting just after 1:15, the metal climbed above it before pulling back. As of 1:37, the spot price was at $1,172.90 for a gain of $0.70 on the day. The Kitco Gold Index assigned -$5.60's worth of change to U.S. dollar strength and $6.30's worth to predominant buying.

The U.S. Dollar Index's decline ended right after noon as it dipped below 83.75. Since then, it's crawled upwards to recover the 80.9 level. As of 1:40, it was at 83.92.

The later-morning recovery held, which is a good sign for the metal; it says that the earlier-morning drop was overdone and suggests that it was unsustainable. Although the start of the later afternoon shift saw gold sink a little, there's a likelihood that gold will close with a gain when regular trading ends.

Update 2: The metal did do so, after drifting upwards in the later part of the afternoon. It was a benign end to a volatile day, one with a second morning plummet in a row. Unlike yesterday's, today was wiped out. If there were any shorters encouraged by yesterday's drop, they're likely cautious now. The ball is back in the longs' court.

Although the movement was too slight to build a mountain of encouragement upon, the U.S. dollar rising in the same time period was still a sign for hope. Although the rise was much slower than this morning's, it still bent the negative-correlation jinx that made itself re-known shortly after regular trading had opened. That jinx does surface during the pit shift, but not in electronic trading (as yet, anyway.)

Gold did drift down gently until 2:45 PM ET, but it only reached $1,172 before reversing. The next move, over the course of the next hour, was upwards to $1,176. The rest of the day saw the metal in a range, with that level being the ceiling and $1,174 being the floor. Gold managed to end the day close to the top of the range; at closing, it was $1,175.60 for a gain of $3.40 on the day. The Kitco Gold Index (KGX) attributed -$9.30 to U.S. dollar strength and +$12.70 to predominant buying. Once again, the KGX had gold trading at a new record high ex-dollar.

There's really no precedent to this divergence. The closest comparison is to the 2008 period, when the KGX bested its February '08 level in late September with gold itself about 10% lower as this five-year chart shows:

The trouble with the comparison is that gold itself performed noticeably worse during that timeframe than it has in the last five months, and the KGX barely bettered itself then while considerably beating its last peak now. The comparison makes gold look a lot better now than in '08, which should allay any concern about an October '08-style plummet in the metal's near future. At most, there'd be another correction.

As noted above, the U.S. Dollar Index spent the rest of the afternoon rising. Starting around 1:00, it lifted itself above the 83.75 level and climbed to above 84.1 by 3:10. The next hour and a half was spent in a narrowing range whose center was just below 84.1. Breaking out of it on the upside, the Index leapt up to 84.25 before settling back down above 84.15. As of 5:30 PM, it was at 84.16.

Its daily chart, from, shows that yesterday's rise did continue today:

I have to say that I didn't expect it to be this strong today, even though I did expect a further gain. Ignoring the wick part of the candlestick, the Index gapped up today. The RSI line, found at the top of its chart, is now well into oversold territory. Its MACD lines, found at the bottom, are in a very solidly bullish configuration. The Index itself is within breathing room of a one-year high. Although weaker, both on the upside and in downward reactions, its rise is definitely reminiscent of late '08's rise - as this three-year daily chart shows:

I'm not questioning the greenback's bull trend, but it is oversold right now. The German legislature approving the bailout is likely to take the wind out of its sails.

Turning to gold, today's action on its daily chart is reminiscent of the day after a far worse session than yesterday's:

Yes, todays' action is like the day after Feb. 4th's sickening plummet. Like Feb. 5th's, today's candlestick shows an interday continuation of the previous day's plummet; it also shows a gain on the day, with the bottom of the body of the candlestick matching up to the bottom of the previous day's. That's a good sign, as it suggests that the bearishness of the previous day has exhausted itself. I can't say that the uptrend will get rolling tomorrow, but it does look like a short-term bottom has been put into place. There may be some muddling around tomorrow, with no real action either way.

The post-pit Reuters report ascribed the reversal of the morning's loss to safety-trade bids, made on the possibility that the Eurocrisis will spread beyond Greece. Amongst the points therein, these were made:
* Gold sharply recovers initial losses on flight-to-quality buying due to worries about the viability of the euro, which was falling toward $1.28.

* Investors sold the metal for liquidity needs as global equities fall for a second day and as commodities led by crude oil slide - traders.

* Flatter U.S. Treasury curve signals deflationary concerns and sharp loss of risk appetite, and that will likely weigh on bullion - James Steel at HSBC.

* The unusual positive correlation between gold and euro is showing signs of breaking down in the past two weeks - analysts
Given the caution still out there, gold is not likely to have a stellar day tomorrow. The metal's action, though, shows an encouraging break of a downtrend. $1,200 isn't out of the cards for this month.

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