Gold Muddles Along In Overnight Session

Despite more fear-related dives in the stock markets, the Euro and crude oil, gold didn't move all that much in the overnight session. Although the metal did not participate all that much in the lastest fear-driven run-up of safety assets, it didn't get driven down like so many other asset classes last night. It dropped for a time in the evening, but recovered later in the night.

That drop, starting around 9 PM ET, took the metal down about five dollars an ounce. Reversing shortly afterwards, gold climbed up to $1,196.50 around midnight ET. That price marked the high of the day so far. After making it there, the metal slid down to the high 1180s before London trading opened. Since then, it was fluctuating between $1,187 and $1,192 before breaking through on the upside around 7:30. As of 8:01 AM, the spot price was $1,192.90 for a gain of $0.60 on the day. The Kitco Gold Index attributed +$9.60 to predominant buying and -$9.00 to strengthening in the greenback.

The U.S. Dollar Index continued its rally, which started in early afternoon, until 6 AM. Although there were stalls and a couple of minor pullbacks, its climb was fairly steady until its high of 87.44 was reached. That made for a more than a hundred and thirty basis points added over the course of seventeen hours. Since the top, a minor but sustained pullback turned into a drop that carried the Index down well below 87.2. As of 8:09, it was at 87.13.

A Bloomberg report, as webbed by Business Week, began by speculating that gold may fall as it continues to be used as a piggy bank to cover losses in other assets.

The euro slid against the dollar after the International Monetary Fund urged Spain to do more to overhaul its ailing banks, adding to speculation that European financial institutions may face greater losses....

Gold is “vulnerable to further cash-generating selling in the short-term given the volatile swings across the broader financial markets,” James Moore, an analyst at TheBullionDesk.com in London, wrote in a report. Increasing ETF holdings and coin and bar purchases continue to “highlight investor diversification towards safe-haven asset types and should limit the impact of long liquidation in gold.”

The report also quotes Dennis Gartman colourfully explaining why falls in other assets can drag down gold:

“We fear that commodity prices are about to come under very real pressure as a result” of a stronger dollar and falling equity markets, said Dennis Gartman, an economist and editor of the Suffolk, Virgina-based Gartman Letter. “This shall be especially true if the margin clerks begin to sharpen their knives as share prices weaken, for they will begin to look for any and all places from which to get liquidity.”

And yet, as also mentioned in the same report, holdings in the SPDR Gold Shares Trust (GLD) jumped up by a more-than-usual amount to a new record of 1,236.89 tonnes. The 16.74-tonne jump was much more than a more normal single-digit increase, suggesting that enough players big enough to rate issuance of more GLD shares are seeing the current dip as a buying opportunity. The report also notes that tensions between the Koreas are escalating.

An earlier Reuters report ascribes gold's fall last night to safety-trade players favouring the greenback for now.

"The pull from the dollar's just been too strong for some today so they're selling into it, but that doesn't mean gold's had it," said a bullion trader in Sydney.

"There's plenty of support for gold left out there."

The mounting war of words on the Korean peninsula as South Korea announced steps to tighten the vice on the North's economy in punishment for sinking one of its navy ships was also triggering some buy orders, the trader said.

Gold briefly staged a recovery above $1,195.00 an ounce after reports North Korean leader Kim-Jong-il had told his military it may have to go to war if the South attacks first, but the price quickly retreated.

So, the escalation did have an effect on gold albeit temporarily. Also mentioned in the report is a Citibank note that expected "scale-in" buying at $1,165.

A Wall Street Journal report contrasted gold's steadiness with drops in other precious metals.

Tension between North and South Korea and worries over Europe's sovereign debt issues with Spain now in the spotlight could propel investors to gold as they seek assets deemed safer over the likes of equities....

Flight-to-quality buying has been the main driver of gold prices this year, said HSBC analyst James Steel. Traders said this trend could continue to benefit gold due to geopolitical nervousness in Korea and risks that sovereign debt in Europe may not only crimp growth in the region but globally.

Also mentioned in the report is UBS sticking to its forecast of $1,300 gold.

A blip-up carried gold close to $1,197 before it pulled back into a decline that continued when regular trading opened. Bottoming at below $1,190, the metal partially recovered after 8:40. As of 8:55 AM, the spot price was $1,192.60 for a gain of $0.30 on the day. The Kitco Gold Index assigned $10.15's worth of change to predominant buying and -$9.85's worth to greenback strength. The U.S. Dollar Index's decline ended at the 87.1 level, and it started to rally around 8:40. As of 8:57, it was at 87.29.

So far, gold's action in today's regular trading has been like the overnight session in miniature: a dip, a rise, but not much change overall. Still, the metal may rally later in the morning.