Wednesday, May 19, 2010

Gold Gets Pummeled In Morning Trading

The same phenomenon that made the gold market treacherous a couple of months ago has reappeared. After an early-morning recovery fizzled, gold plummeted in early-mid morning trading; another one of those air pockets has appeared.

It was trending up slightly until the storm visited. Although the metal couldn't get above $1,210, it was crowding that level until just after 9:30 AM ET when the plummet hit. After it was done wreaking its damage, just before 10:15, gold was left at $1,192. A subsequent relief rally couldn't get above $1,200. As of 11:45 AM, the spot price was $1,194.10 for a loss of $28.90 on the day. The Kitco Gold Index attributed a very large -$38.70 to predominant selling and +$9.80 to weakness in the greenback.

As far as triggers are concerned, the stock market was not one of them. At the time when gold was plummeting, the averages were actually trending up. It wasn't until the plummet was mostly over that the averages joined in; the S&P 500's own plummet lasted until 10:24. It could be somewhat implausibly argued, on timing considerations, that gold's plummet triggered one in the U.S. stock market.

A better trigger candidate would be the U.S. Dollar Index, which flailed around a plummet line of its own which started just after 8:00 AM. Beginning when the Index was above 87, the wild drop didn't end until it bottomed at 86.40 as of 10:34. Subsequently, it pulled up in something of a relief rally while keeping its volatility. As of 11:45, it was at 86.65.

The game has changed, perhaps to some of the older rules. Gold and the greenback are still trading in concurrency, and not opposed to each other, but the old parlousness of early-mid morning has come back. The momentum selling may be over and done with, but there's a risk of another drop nearer to the end of the pit shift.


Update: The next wave did come, but it wasn't that bad. At its lowest, just before noon ET, gold was at $1,185.90.

$1,200 was still out of reach. After the second selling wave climaxed, the metal spent some time hovering around $1,190 until 12:50. Later, it climbed up a little but couldn't reach $1,195. At the end of the pit shift, as of 1:30, the spot price was $1,192.30 for a loss of $30.70 on the day. The Kitco Gold Index assigned a huge $41.80's worth of drop to predominant selling and +$11.10's worth to a weakening U.S. dollar.

The U.S. Dollar Index began to calm down after its wild rise earlier in the day. As the fluctuations decreased, it settled mostly down to around the 86.55 level. As of 1:33, it was at 86.57.

Now that the pit shift is over, gold is likely to stay about where it is. The damage has been done, but plummets typically don't spill over into the electronic-trading shift. Today's guess at the close, out of my proverbial hat, is $1,198.00. There's an outside chance it'll crawl up to $1,200.


Update 2: Again, I was off by a fair amount. Instead of creeping back up, gold crawled back down and stayed in a range between $1,190 and $1,195. A dip slightly below $1,190 at 2 PM ET failed to take, and the metal stayed in that range for the rest of the day.

The close was at the lower end: $1,191.40, for a drop of $31.60 on the day. The Kitco Gold Index attributed a whopping -$49.40's worth of decline to predominant selling, and an unusually large +$17.80's worth to a weakening greenback.

Needless to say, the U.S. Dollar Index collapsed today. It was over 87.1 as recently as 8 AM; by 5:30, it was at 86.14. The rest of the afternoon didn't see the wild swings seen in the morning, but the same downtrend was there. The early-afternoon resting point around 86.55 gave way around 1:40, and another around 86.25 also gave way in late afternoon.

The Index's daily chart, from Stockcharts.com, shows (incredibly enough) that it's still overbought:



As shown on the top of the graph, its RSI value is still above 70; that signifies overboughtedness. Although today's plummet was a wild ride downwards, the end result was today's decline paralleling yesterday's gain. Today's closing value for the Index was quite close to yesterday's open.

I have been suggesting that the Index was due for a fall, but an abortive attempt to time it showed that I couldn't pinpoint the time. Today's action is part of a three-day plateau that has left the Index still well above 86. With the exception of the cautionary RSI, the technical signs still indicate a strong bull run. I reiterate that it's vulnerable to a sharp pullback, but so far there isn't a sign that it's imminent as yet

The plummet today coincided with one in gold, though, which makes it look as if the crisis premium in both is evaporating. Unlike the Index's chart, gold's shows a fair bit of damage done today:



Gold's RSI number is now far from overbought; it's only slightly above neutral. Moreover, and more to the point, its MACD lines at the bottom of the chart have been knocked from a solidly bullish configuration to bearish. The sell-in-May rule seems to be working, or wreaking.

Despite gold's failure to hold $1,200, it's still up a fair bit in the last month. As recent news reports have indicated, one of the reasons for the draining of the crisis premium was gold providing profits that could be deployed to meet margin calls elsewhere. That's one of the reasons why bear markets jack up the correlation between normally uncorrleated asset classes; it isn't just contagious fear that does so.

The next two days are going to be tests of the current intermediate-term uptrend. If the declines halt, and the price slowly picks itself up from the mat, then the uptrend may still be intact. Without any immediate crisis driver, though, gold is likely to lumber instead of shoot up.

The other possibility is a further downturn, perhaps after a relief rally day or two. If gold closes below today's $1,185 interday low, that might as well be an engraved invitation to technically-guided shorters to wade back in.

A post-pit Reuters report begins by noting that gold was driven down by those above-mentioned liquidation sales. Amongst other points therein, these were made:

* Gold heavily pressured by selling related to margin calls to cover losses in other financial markets - traders.

* Bullion investors move to sidelines as euro rallies against dollar after hitting four-year low in early trade.

Those two get to the nub of the matter. Short selling wasn't mentioned. Interestingly, nor was momentum selling - even though momentum funds bailing out was the logical shoe to drop after their pile-in earlier this month. Given Dennis Gartman's decision to liquidate his own holdings, there may have been some copycat momentum selling hidden in the cash-raising crunch.

As for tomorrow, there is a risk that gold will plummet further. If it does, but recovers by the end of the day, it'll have given a good sign. The metal has done exactly that for two recent short-term lows, not to mention the Feb. 5th one that brought an end to its earlier correction. All told, a wild yo-yo'ing ride tomorrow would give grist for a little optimism afterwards.

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