Wednesday, May 12, 2010

Gold Drifts, Rallies In Afternoon, Pulls Back

After making a new record high during the European trading slot early this morning, gold had pulled back a little before it stabilized. Its morning peak came just before the start of regular trading, at $1,242.50 as of 8:20 AM ET. When the pit shift opened, the metal sunk by more than eight dollars an ounce.

Its later rise was staggered by pullbacks. After reaching close to $1,242 around 10:30, the metal sunk back down to $1,234 before pulling up somewhat. Overall, the morning's trading defined a range between the two values mentioned above; even at its lowest, gold was still above its closing value yesterday. As of 11:45 AM, the spot price was $1,236.60 for a gain of $5.20 on the day. The Kitco Gold Index attributed +$5.80 to predominant buying and -$0.60 to strengthening of the greenback.

The U.S. Dollar Index stayed steady for most of the morning, but began climbing late in the time period. Stuck in a range between 84.45 and 84.65 until 11:20, although briefly penetrating it on the downside at 10:00, it rallied above 84.8 around 11:30. As of 11:47, the Index was at 84.74.

On a momentum basis, gold has come to a halt but it could start moving again. My own inclinations lead me to expect a downturn, but it could go either way or neither way; straight technical analysis would call for a continuation of the range. The afternoon will tell.

Update: The early afternoon part of the session resembled the later-afternoon part of yesterday's. After bottoming at $1,234 as of 11:15 AM ET, the metal went on a sustained if occasionally interrupted rally that took its price up to a new record high. That high, $1,248.20, was made just after 12:45 PM. Since then, gold tailed down to the top of its earlier range: $1,242. After rebounding to almost $1,246, the metal tailed off again to leave its price near $1,144 at the end of the pit shift. As of 1:47 PM ET, spot gold was $1,244.70 for a gain of $13.30 on the day. The Kitco Gold Index assigned -$1.90's worth of change to strength in the greenback and +$15.20's worth to predominant buying. The two figures sum up to the raw change on the day.

The U.S. Dollar Index, after jumping up to above 84.8, did little subsequently except drift down and back upwards. Bottoming below 84.7 at 1:00, it climbed back to reach 84.8. As of 1:49 PM, it had levelled at 84.82 after advancing to 84.86.

Today's mark to watch is $1,250; gold came very close to reaching it in the later part of the pit shift. Normally dormant, the electronic-trading shift has seen some nice gains recently. At the risk of sticking my other foot in my mouth, I'm going to guess that a new all-time high will be made later this afternoon at above $1,250. Althouhg it may later, the momentum shows little sign of slowing down as of yet. Whether I'm right or wrong, there's a good chance of a double-digit gain at the end of the session; an overall gain is almost certain.

Update 2: Thanks to a later-afternoon fade-back, gold did not close with a double-digit gain; instead, only a single-digit gain was sported at the close. Although a new all-time high was made in later-afternoon trading, it fell short of my guess by forty cents; it was $1,249.60. Still, it was close enough for someone less rigorous than myself who predicted $1,250 gold for this year to declare that prediction to have been fulfilled. (Myself, I didn't.)

The metal continued to inch up after the last update to 2:15 PM ET, when it stalled before making its new record around 2:30. From then, the price sunk to $1,238, reached at 3:45. Pulling up a bit, it reverted to dropping although in a drift rather than all-out decline. At the close, spot gold was at $1,237.10 for a gain of $5.70 on the day. The Kitco Gold Index (KGX) attributed +$8.30 to predominant buying and -$2.60 to greenback strength. Thanks to the former component, the KGX had gold ex-greenback at another record closing high today.

The U.S. Dollar Index spent the rest of the afternoon dawdling, mostly upwards. From its low made at 1:00, it rallied for an hour before settling into a rising-bottomed range with ceiling of 84.88. That range was gently surmounted as of 4:40. Shortly afterwards, the Index plateaued at 84.92 before pulling back; as of of 5:30 PM, it closed at 84.83.

Its daily chart, from, shows yesterdays' recovery from the Eurobailout-induced letdown continued today:

As is evident from the RSI line at the top of the chart, the Index's RSI value is back in overbought territory. Rather than being a mere relief rally, the upswing over the past two days has pushed the Index very near to its highest closing value of 2010. It has some ways to go to making a new interday high for '10, but it's not all that far away.

Given the sharpness of its rise over the past month, there's a risk of a sudden downturn rather than a mere pullback. As of now, though, the risk doesn't seem to be all that great. The Index may continue to oscillate near and below 85, if not break above it to a new one-year high. There isn't any bearish driver behind the immediate horizon to push it to plummet, and the Index isn't prone to plummets due to market internals. Still, overbought is overbought; if the Index takes off on a renewed run at this level of overboughtedness, it would be setting itself up for a shock plummet that may be only short-term in duration.

The level of overboughtedness is higher with gold, as its own daily chart shows:

To be more specific, gold's RSI value is higher into overbought territory. However, the duration of the overboughtedness isn't as extensive all told. It's only been the third session in a row that gold's RSI has been in overbought territory, while the Index's has been so for the last four sessions out of five.

Gold's run-up late last year was notable for continuing while in overbought territory, which hasn't been a feature of the present rally. In other words, gold is less vulnerable to a vicious and sustained pullback than it was at the beginning of last December. In this context, I can say that a pullback would be healthy for the rally overall. Short-term rallies that start in overbought territory, like the one that started on November 19th, tend to come to a bad end when they run out of gas.

That being said, the present rally shows little sign of exhaustion as yet. The later-afternoon decline would have to be reinforced by an overall decline this overnight session for a real short-term pullback to set in. Whether or not one does, largely depends upon how much profit-taking is called forth by gold just missing $1,250.

The end-of-pit Wall Street Journal report ascribed today's rise to continued safe-haven appeal, as well as to inflation hedging, as the worries about the indirect effects of the Eurobailout continue. As the concurrency effect between the greenback and gold indicate, the inflation being hedged against is expected to bloom in Euroland:
"The sovereign debt issues are not yet resolved," said Ira Epstein, director of the Ira Epstein division of The Linn Group, an asset management and brokerage firm.

In addition to these worries feeding safe-haven demand, some are now returning to the metal as a hedge against inflation.

"The market is starting to contemplate how much currency is going to be thrown" at the debt crisis, Epstein said....

"The gold price is being driven by ... the rising concern of the 'exit strategy' for central banks given that the ECB is the latest agency to join the (quantitative easing) bandwagon," J.P. Morgan analyst Michael Jansen said in a note.

"Indeed, the perceived breach of the ECB's independence...adds to the view that in the long-term monetary and fiscal authorities will be forced to choose between anemic economic conditions or monetary-driven inflation."
In other words: Euroinflation is baked in the cake, and won't be removed without a painful, politically difficult and quite possibly bailout-counterproductive effort. The ECB's hands, despite steps taken to sterilize its planned quantitative easing, might be tied right now with respect to rising inflation.

The gold market is still heady, and may have some rally left in it. Any rally at this point, though, should be sized up as if it were on borrowed time. Not only the RSI level, but also overall sentiment is in the toppy range. In times like now, pullbacks are healthy.

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