Wednesday, May 26, 2010

Gold Fluctuates Up In Morning Trading

After going nowhere when regular trading started, gold slumped to the $1,210 level and stayed there until just before 10 AM ET. The news that April U.S. housing starts jumped 14.8%, on the heels of a 29.8% surge in March, helped push gold up again. The peak of the rise wasn't reached until 10:45, when gold made a new daily high of $1,217.80. Since then, though, the metal backed off by falling to just above the $1,210 level. As of 11:52 AM, the spot price was $1,211.00 for a gain of $9.80 on the day. The Kitco Gold Index attributed +$19.20 to predominant buying and -$9.40 to a strengthening greenback.

The U.S. Dollar Index, after some trying, made it above 87. Breaking through that level in mid-morning, in the latest stretch of a rally that began before 8 AM, the Index managed to make it to 87.18 before falling back. Since 9:00, the Index's rise has been fairly ragged. As of 11:53 AM, it was at 87.08.

Gold's mid-morning sell-off was both stronger and earlier than yesterday's. Although the metal is solidly in the gain column, its sledding is tougher now. Afternoon trading will show if $1,210 holds.

Update: That mid-morning decline was not followed by a further drop. During the rest of the pit shift, gold rose a little.

Its drop to a little above $1,210 proved to be the bottom. After hovering just above $1,211 until noon ET, the metal climbed up to $1,214 before settling in to a trading range bound by that price on the upside and $1,212 on the downside. As of the end of the pit shift, or 1:30, the spot price was $1,213.80 for a gain of $12.60 on the day. The Kitco Gold Index assigned +$21.10's worth of change to predominant buying and -$8.50's worth to greenback strength.

The U.S. Dollar Index pulled back from its morning run to the 87 level. Settling around 87 by noon, the Index stayed there in a trading range centered around that same level. As of 1:36, it was 86.96.

Again, gold is on track towards logging in another solid gain. The rest of afternoon trading will show how much it will be.

Update 2: Due to a pullback, the gain was lessened to less than ten dollars an ounce. The later-afternoon doldrums were accompanied by a pullback to the $1,210-1,211 level.

The above-mentioned trading range held until 2:40 PM ET, although it was tested on the downside at 2:00. Once $1,212 was broken through, the descent wasn't all that much; $1,210 wasn't tested. Before a recovery uptick, the price meandered between $1,210.50 and $1,211.75. That uptick pulled the price up above $1,212, but it ended up dissipating as regular trading came to an end. As of the close, the spot price was $1,210.60 for a gain of $9.40 on the day. The Kitco Gold Index attributed +$22.40 to predominant buying and -$13.00 to a strengthening greenback.

The U.S. Dollar Index did strengthen more in later afternoon. A fairly consistent rally took it from 86.9 as of 1:50 PM to 87.345 as of 5:30, leaving it near a fifteen month high.

Its daily chart, from, shows today's rally putting it back into overbought territory:

For the third day in a row, it advanced. The vulnerability I saw in the chart yesterday has yet to make an appearance, as today's action shows. Again, a weakening Euro kept the Index on a rising track.

I have to admit that the Index seems unstoppable. Although its continued rise may simply limn my talents as a forecaster, it does show the danger in expecting a technically overbought situation to reverse itself. I've certainly learned that a trend can extend for longer than I would expect it to.

The MACD lines at the bottom of the chart did approach a bearish crossover yesterday, but they're farther away from doing so today. Overboughtedness, although only slight, is indicated by the RSI line at the top: it's a little above the overbought level of 70. The Index has not made a new high, as it did yesterday, indicating resistance around the 87.5 level. More significant resistance is at the 88 level: that's where the late '08 part of the Index's run topped out.

Right now, the Index is still in a short-term holding pattern. Saying that the current rally marks the resumption of its uptrend would have to wait for a definitive advance above 87.5 or even 88. Should it go past the latter level, the Index is close to being in uncharted territory. The chaos god still rules.

As for gold, it too advanced for the third day in a row:

It turned out that gold's RSI dipping below the 50 (neutral) level did signal an end to the dip. Yesterday's besting of the $1,200 level held today, while gold's MACD lines are still in a bearish configuration. Actually, the metal's closing value on the day that the MACD lines crossed over into bearish territory was slighly lower than today's. That's a fairly good sign.

Unlike the U.S. dollar index, there's no sign of gold's rally being overextended. Its near-correction took a fair bit of froth out of the market, and has laid the ground for a reaction that's stronger and longer than would have been the case had gold corrected outright. The advance has gone past sucker-rally levels. That said, there's still the possibility of a downturn in the near future carrying the metal down below $1,200. A new short-term low is unlikely.

A post-pit Wall Street Journal report notes that the demand for gold is also being fueled by expectation of Eurozone inflation:
"People [once] thought the euro was a safe haven from the dollar, but obviously it's not a safe haven from anything," said John Hathaway, portfolio manager of the Tocqueville Gold Fund in New York.

Debt issues initially surfaced in Greece, and this became the "tail that wagged the dog for the whole European community," Hathaway said. Investors are now also worried about deficits in other nations such as Portugal and Spain.

"It's made a travesty of the idea of the fiscal discipline that the euro was supposed to bring to its constituent member states," Hathaway said.

Several analysts said potential for eventual inflation also is supporting gold due to factors such as fiscal stimulus, loose monetary policy and a European bailout of financially strapped nations less than two years after the U.S. bailed financial firms.
It does look like the dip has passed. There's a certain wisdom in the value-investor stance, which advocates selecting a price zone, buying in when it's reached, and sitting out any further decline. Gold may continue to go up tomorrow or it may backtrack, but the intermediate-term bull run is still intact. There'll be no reason to question it unless the metal tops out at a lower level than it did earlier this month.

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