Tuesday, May 11, 2010

Gold Closes Above Record High

According to Bespoke Investment Group, the all-time high for gold in U.S. funds is $1,226.40. At about 9:50 AM ET, the metal almost made it to that level. It crested at $1,225.60, within a dollar of that record, before pulling back.

After an initial run that pushed it above $1,220 just after regular trading began, gold paused at $1,221 before pulling back and then reaching that near-record. It then pulled back again to around the $1,222 level before falling below $1,220. As of 11:37 AM, the spot price was $1,217.30 for a gain of $14.60 on the day. The Kitco Gold Index attributed +$16.50 to predominant buying and -$1.90 to strength in the U.S. dollar.

The U.S. Dollar Index moved little in morning trading until the last part, when it dropped. After initially descending to below 84.35, reached a little after 9:50, it recovered but couldn't make it above 84.6. As of 11:40, after a renewed bout of sinking, the Index was at 84.34.

It was close, but there's no record-high cigar as yet. The wind is now out of gold's sails for the moment, but there's still an outside chance at the metal making that record high in the afternoon.

Update: Gold did get back up above $1,220, but the record remained out of reach. After sinking down below $1,216, bottoming at 11:45 AM ET, the metal climbed back unevenly but steadily to just above $1,220 as of 12:50. Pulling back, the metal retraced some of that gain to below $1,219 before rising again to $1,221; that rise didn't last. As of 1:41 PM, the spot price was $1,219.40 for a gain of $17.10 on the day. The Kitco Gold Index assigned $17.80's worth of change to predominant buying and -$0.70's worth to strength in the greenback.

The drop in the U.S. Dollar Index continued until 1:00 PM, when it touched the 84.2 level. Since then, a recovery rally pushed it up above 84.3. As of 1:43, it was at 84.34.

With the pit shift over, the metal is still more than five dollars below the record. It looks like the chance was missed, and gold watchers will have to be satisfied with a new 2010 high.

Update 2: As a commenter pointed out, I got some egg on my face from the guess jsut above. Gold did make a new all-time high, and I did miss it. As the day turned out, the metal began rallying shortly after the last update steadily enough to make the last record yield.

The line was crossed at about 3 PM ET, in the midst of a strong rally that started at 2:50. Stopping at 3:20, at its new record high of $1,235.30, the metal pulled back only a little before carving out a trading range between $1,231 and $1,234. As of the close, spot gold was at $1,231.40 for a gain of $28.70 on the day. The Kitco Gold Index (KGX) attributed -$4.30 to a strengthening U.S. dollar and +$33.00 to predominant buying. As fitting for a day when the most-watched record was broken, the KGX's tracking of gold's performance ex-greenback made another record high today.

Again, the concurrency effect between the U.S. Dollar Index and gold showed up. Starting at 1:00, when it was below 84.2, the Index rallied with a few mild pullbacks and a marking-time stretch for about an hour between 3:30 and 4:30. When the regular-session timeframe had ended, at 5:30 PM, the Index was at 84.71. It hasn't bested its 2010 high, while gold has made a new record - further evidence that the safe-haven momentum has shifted to gold.

The Index's daily chart, from Stockcharts.com, shows its recovery from yesterday's drop and its return to overbought levels:

Given the action of the last two sessions, today's rise was relatively sedate. The Index is back in overbought territory, as indicated by its RSI line at the top of the chart; any value above 70 indicates an overbought state. Like gold's rise, the recovery in the Index has been driven by skepticism about the efficacy of the Eurobailout: not skepticism over its passage, which seems a done deal now, but about its efficacy. There's still worry that the sovereign debt of both Portugal and Spain will tip into free fall, like that of Greece earlier. The latter country's government going into fiscal-crunch free-fall would overwhelm even the 750 billion Euro package currently being put together. Even if the bailout succeeds, there's still worry about what it would do to the Euro down the road.

In the case of gold, it's similar - except the latter worry is predominant. Like before, gold is rallying after the rescue on the assumption that the bailout will mean more inflation down the road. The metal's own daily chart shows the extent of its rise today, into new record territory:

Admittedly, I had an inkling that it was coming last night but the overboughtness of the metal caused me to shy away. I did say that gold's action between May 5th and yesterday did resemble February 5th to 12th's. I pulled back from it because gold is nowhere near bargain levels now, and it was back in early-mid February. Evidently, my guesses get worse when the train's rolling at high speed in or near overbought territory.

As gold's own RSI line indicates, it is back in an overbought state. At this point, I have to say it's in the hands of the chaos god, or is in a mini-mania like that of late '09. Whether you benefit or not from gold's rise right now, you might as well sit back and enjoy the ride. Myself, I have a little money in gold exploration stocks; despite my skeptical words, I'm still all in and haven't changed that exposure. Whether disguised complaint or no, I further disclose that the stocks I have haven't gone anywhere over the last stage of this rally. Since these stocks are in the investment underworld, their connection to gold is sometimes tenuous. The HUI average, composed of major producers, has been rallying strongly of late. I note futher that the stocks it's composed of have not been shooting up with gold until recently. The fact that this strength has not reached down to the gold underworld, and has taken its time before transferring to the senior stocks, is a sign that the manic phase of late is only a mini-mania confined to the metal itself. Real manias affect even the underworld stocks.

I want to emphasize that I do not believe that gold is in an all-out bubble as yet. I believe it's on the cusp of one, but the full-fledged mania phase is far from being a reality now. We may read or hear warnings that gold's in a bubble about to burst, again, if the metal continues rallying. They can be taken in stride as warnings of overboughtedness, but I would be very surprised if the recent calls for a gold bear market came to pass. If any such calls surface, I won't go along with them.

As for gold going in to the start of an all-out bubble, there's a test this summer that will shed light on the issue. Traditionally, May has been toppy; the period from June to August hasn't been that good for the metal. If that tradition is broken this summer by gold continuing to rally further, that would be a sign that the metal is tipping in to a real bubble phase. I expect such a bubble to last a few years, not a few months, and there will be at least one scare in the middle of it. The mid-bubble scare is a phase of all real bubbles.

If there's any characteristic of a mania, it's this: a bubble market does everything it can to shake out everyone with any experience with the investment. As it continues into nosebleed territory, more and more experienced players pull out because it seems too high to be true. The real climax of the bubble doesn't start until new entrants, both inexperienced and credulous, make money hand over fist. It's not far from this point that the cocktail-party indicator kicks in. We're not at that stage now, so gold is not in an the climax phase of an all-out bubble as yet. I have my doubts as to whether we're even in the beginning of one.

As for tomorrow's action, a new record may be set again; I honestly don't know, as one of my blind spots is mini-manias. Given that we're in the month that the old saying says to sell in, the rally may not last that long - but it might. The only suggestion I have is to sit tight and enjoy the ride. Gold did make a new record high today, and it's been some time coming. The Eurocrisis has hastened what would have been a recovery in the metal no matter what. Regardless of the vagaries of the metal's action, I also suggest not being rattled by any gold skeptic decrying gold at this point. Myself, I'm in my comfort zone; I'm neither adding to nor subtracting from what little I've got in gold-related stocks. That seems the best way to ride out a manic phase in a longer-term bull market.

As a postscript, the supposedly inane phrase "buy on dips" is made for times when an investment's rally seems unstoppable.

1 comment:

  1. wrong again lol keep guessing mate!