Tuesday, May 18, 2010

Gold Mostly Recovers From Early-Morning Drop

Although gold in late morning trading was well below the levels it had been around midnight ET, it recovered most of the drop it had suffered early in the morning. As the early European session turns from good to bad, the regular trading session on this continent is turning for the better.

When regular trading began, gold was below $1,210. An aborted move starting at 8:30 gave way to a more sustained uptrend. Although interrupted, it lasted for almost two hours and carried the gold price above $1,218. From 10:30 AM, the metal was fluctuating in a trading range centered just above that same $1,218. As of 11:43, the spot price was $1,219.90 for a loss of $4.20 on the day. The Kitco Gold Index split the loss into -$2.60 for predominant selling and -$1.60 for strengthening of the greenback.

The U.S. Dollar Index, after stumbling down to below 85.95, managed to rally later. Initially hesitant, the rally got rolling around 9:55 and ended up carrying the Index to 86.38 by 11:22. The subsequent pullback was well on its way to reversing. As of 11:45, the Index was at 86.36.

If there's any bearishness lurking around the gold pit, it's been well hidden. Longs were still stepping up to the plate. Although halted in late morning, that recovery play may continue in the rest of the pit session.

Update: It didn't. An attempt to get above $1,220 was thwarted a little before noon ET, and the metal descended to $1,212. Having reached that level as of 1:15 PM, the metal recovered somewhat as the pit shift ended. As of that ending, 1:30, the spot price was $1,214.70 for a loss of $9.40 on the day. The Kitco Gold Index divided the loss into -$6.20 for a strengthening greenback and -$3.20 for predominant selling.

The U.S. Dollar Index continued to recover from its droop earlier. After hovering just below 86.35 until 12:55, the Index climbed rapidly to 86.72 before pulling back to around the 86.6 level prior to a recovery. As of 1:42 PM, it was at 86.77.

Yesterday, after drifting along, gold took a tumble in mid-afternoon before partially recovering; a similar drop, although starting later, visited the gold market today. Yesterday's post-pit decline may continue in post-pit trading today. As far as the number I pick out of my hat, it'll be $1,210 for today's close.

Update 2: Once again, I was flummoxed. Instead of turning down, gold recovered in the later-afternoon session; for a time, it was in the plus column. That gain was erased later in the day, but enough was left to whittle down the loss on the day to a miniscule amount.

[As an aside: if you're interested in playing along, please feel free to leave a guess of your own in the comments.]

The decline that started at 11:30 AM ET continued until 1:45, bottoming at $1,211. When 2:00 came along, what was a period of lassitude turned into a strong rally that didn't quit until gold reached $1,224 right after 2:20. The announcement that the German government would ban naked short selling of certain bonds, bond CDOs and bank shares sent the stock market in a tailspin, and took away the return-of-normalcy sentiment that was pulling gold down and equities up. It brought back the panic, as it was reminiscent of the SEC's ban on short-selling certain financial stocks back in the TARP days.

With fear returning, gold made a leap to a new daily high after spiking up to $1,228. Although the peak of $1,230.40 proved to be another spike, presaging a decline that went all the way down to $1,220 when it finally ended, it spoke to the fear returning. Once bottoming, as of 4:00, the metal turned back and spent the last hour climbing before a final sell-off pushed it back into the loss column. As of the end of regular trading, the spot price was $1,223.00 for a loss of $1.10 on the day. The Kitco Gold Index (KGX) attributed -$15.10 to a strengthening greenback and +$14.00 to predominant buying. Thanks to the latter attribution, the KGX had ex-greenback gold making another record high today.

As indicated above, the U.S. Dollar Index spent the rest of the afternoon on a bit of a tear. Continuing ahead in a rise that started about 10 AM, it spike to about 87.35 just before 3 PM. Pulling back to a little below 87.1, it continued rallying around 4:45 and rallied until 5:30. As of that time, it hit 87.38.

Its daily chart (from Stockcharts.com) shows that the one-day reversal I thought was there yesterday, wasn't:

Despite my short-term timing being off, I have to reiterate that the Index is dangerously overbought. It did get to a new fifteen-month high, but that erasure left its RSI number in even more of an overbought position than it was yesterday. The last time the RSI value was this high was during mid-September of '08, and its rocketing upsurge turned almost on a dime when it finally stumbled. The Index's current momentum may leave me yammering in the wind for some time, but it's only a matter of time before the wind shifts. Until then, it's in the hands of the chaos god.

With respect to the U.S. government, the greenback's rocket-up is both bad news and good news. It's bad news because President Obama stuck his neck out with an export-oriented growth strategy, which a high greenback is going to make more difficult. It's also good news, though, because a higher U.S. dollar makes imports cheaper. The lifeboat import needed by the United States is, of course, capital - and the biggest importer is the United States Treasury. As long as the greenback keeps going up, there'll be more demand for U.S. securities and fewer qualms about tying up funds in U.S. Treasury securities. Demand for them by foreigners is already turning up. As long as that demand is rising, the U.S. will enjoy relatively low interest rates and no fiscal hell will break loose in America.

I have to conclude that, perhaps after a sub rosa tussle, the current Adminstration is complaisant with a strong-greenback policy. Granted that exports will suffer, but import prices - not just the price of renting capital, but all import prices - will tend to drop. That'll make the U.S. inflation figures lower than they otherwise would have been. Lower inflation figures, ceteris paribus, mean lower nominal rates for the U.S. Treasury, refinancers, and other U.S. borrowers. Perhaps this is why President Obama pinned his hopes on a productivity miracle in export industries.

The reason why gold and the greenback are moving in concert, other than they being the two beneficiaries of the fear trade, is because the Euro and pound are doing worse. Competitive devaluation is coming back. I know I'm speculating, but I have a suspicion that the economic powers that be in the U.S. know it and want to 'lose.' In other words, they want the other currencies to depreciate faster than the greenback. Why? Because it makes too much fiscal sense - regardless of the net cost to GDP - for the greenback not to rise. Not only will inflation numbers be lower, but also global demand for U.S. Treasuries will help keep U.S. rates low. The Treasury, I need hardly elaborate, needs low rates. If GDP has to suffer a little on account of it, there's the "new normal" narrative to fall back on.

With respect to gold, its own chart shows a daily gain because of the earlier cut-off time:

Despite the early-morning spill, as shown by the long lower wick on today's candlestick, the chart has gold eking out that gain. Since gold is also in the hands of the chaos god, I have little to say about the metal in this section except for a longer-term speculation tied in to the strong-greenback one above:

The last time that gold and the greenback rose in tandem for some time was in 1979, at the cresting of the late-'70s bubble. There may be warning cries raised now as a result, but I think the concurrency can last longer now than then. I can't claim that Treasury officials have thought of it, but the U.S. dollar deteriorating more slowly than other currencies does give the extend-and-pretend game a lot more breathing room. Moreover, a rise in U.S. inflation will be relatively safe as long as the inflation rates of other major currency zones [except Japan, of course] are higher. This round of the game won't come a cropper until all fiat currencies are widely discredited, which may take a long time.

As long as extend and pretend works by 'losing' the competitive-devaluation race, there will be a tendency for gold and the greenback to rise together. Not for months, but for longer. It may be for several years unless things get out of hand sooner.

Returning to a more immediate focus, gold may continue to recover tomorrow morning or revert to the recently-established decline pattern in the wee hours. May's still got some way to go.


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