Tuesday, May 25, 2010

Gold Rallies Again In Morning Trading, Breaks Above $1,200

Although the advance was ragged, gold poked up above $1,200 in mid-morning trading before falling back. The rally started at 8:40 AM ET, when the metal had bottomed at a little below $1,190. After lumbering up for the next two hours, it reached a morning high of $1,201.40 at 10:40 AM. Since then, it pulled back to the $1,198 level; a further dip was all-but reversed. As of 11:42 AM, the spot price was $1,197.90 for a gain of $5.60 on the day. The Kitco Gold Index attributed +$12.70 to predominant buying and -$7.10 to strength in the greenback.

The U.S. Dollar Index remained below its early morning high of 87.445 despite a later attempt to best it: that try topped out at just below 87.4 as of 9:10. Bottoming at just below 87.0, the Index fluctuated around the 87.05 level after that bottom was reached. As of 11:44, it was right at 87.05.

Again, the morning part of the pit shift has been pretty good for gold. Although the $1,200 barrier was not scaled, the metal appears headed for a second gain in a row. Whether it does will be determined by the action of the afternoon session.

Update: As the pit shift closed, gold continued to meander around the $1,198 level. There was another challenge of $1,200, but it came to naught without making a new daily high. No serious dip took place, either; overall, gold fluctuated. As of 1:29 PM, the spot price was $1,198.10 for a gain of $5.80 on the day. The Kitco Gold Index assigned +$10.50's worth of change to predominant buying and -$4.70's worth to greenback strength.

Despite that overall strength, the U.S. Dollar Index fell as the 87 barrier was broken through once again. Unlike mid-morning's dip below, this one proved to be more sustainable. Dropping to almost 86.9 as of just before noon, the Index recovered only to just below 87; a trading range ensued that was centered at about 86.9. As of 1:38, it had recovered to the upper end by hitting 86.98.

Another pit shift ended with gold higher than it was at the beginning, and with an overall gain on the day besides. There's a good chance the metal will hold its gains, leaving gold with a second daily advance in a row.

Update 2: Not only did it hold on to its gains, but also it closed above $1,200. Gold tested the $1,200 level a third time at 2:45 PM ET subsequent to slumping in a post-pit letdown. Falling back to a little below $1,198, the metal slowly advanced back up to $1,200. The level itself was broken at 4:15. After some time hesitating around it, gold climbed slightly over before dipping back down to it. A last-minute spurt at 5:00 notched up a new high of the day, $1,205.50. Although descending again afterwards, the metal still managed to end regular trading above $1,200. At the close, the spot price was $1,201.20 for a gain of $8.90 on the day. Unusually for the recent period, the Kitco Gold Index partitioned the daily gain into two sub-gains. It was split into +$7.80 for predominant buying and +$1.10 for a weakening greenback.

That overall weakening resulted from the U.S. Dollar Index taking a tumble in the later afternoon. Right after 1:30, the Index inched up to around 87. Starting at 2:05, it dropped; although broken up into stages, the tumble took the Index all the way down to 86.34 when 5:30 rolled around. From its high at 6 AM, it lost about a hundred and ten basis points.

Its daily chart, from Stockcharts.com, shows how volatile the day was:

Since the cut-off time for the chart was earlier than 5:30, the day's candlestick shows a slight gain instead of a loss. It also shows the Index touching a new fourteen-month interday high, as well as it falling as low as 85.5. All told, it had one of its most volatile days: the total spread was about two full points.

Coming near the top of a large run, its action isn't very cheering. Volatility combined with overall directionlessness at the top of an extended run suggests distribution; it's more consistent with a reversal than a continuation. At this level, the Index is very close to being overbought.

Also, and more significantly, its MACD lines are very close to a bearish crossover. Found at the bottom of the chart, the black line and the red line are almost on top of each other. So far this year, a bearish crossover hasn't signalled a rout but has signalled a decline of some note. Most typically for the current bull run, it's signalled a lumbering downturn that lasts for some time even though such downturns haven't sliced an awful lot off the Index. I may be jumping the gun, but the action between the chart's end and 5:30 suggests that the lines are going to cross over soon. If precedent is followed, any decline will be orderly. The only reason to not expect an orderly downturn is the Index's present overextendedness.

The day was better for gold, as its own daily chart shows:

For such an extended decline, one that nearly was an all-out correction, gold's rally these past two days has been fairly robust. Although gold's own MACD lines are still in a bearish configuration, an all-out rout would not have seen a two-day stretch as strong as the one the last two days have shown. In retrospect, it looks like the dip that everyone was supposed to buy on ended last Friday.

That's not to say that gold will not go lower, but it does speak to bargain hunting around the $1,175 level. Without a plummet shooting the metal down well below that price point, there was no incentive to lower it significantly. Should gold turn down without that kind of a plummet occurring, bargain hunting is likely to kick it around $1,175 again. Unusually for the ETF, the SPDR Gold Shares Trust's holdings have shown large buying on the dip recently.

One interesting facet of today's action is the breaking of the recent concurrency, to gold's benefit. The gold-greenback relationship has not gone back to an inverse correlation, but there are hints of the more standard pattern reasserting itself. Gold suffered more of a post-Eurocrisis letdown, after it getting less overbought than the U.S. Dollar Index did, so it's fitting in a way that the metal would fare relatively better today. During previous let-ups, the Index would sink after reaching new plateaus and gold would rise because the cost of the bailouts began to sink in. This iteration, it was different because both rose even though the Index had the stronger run. With gold's recovery, we may be seeing the same hangover effect reassert itself.

The end-of-pit Reuters report ascribed gold's rise to continued safe-haven buying, and contrasted the metal's performance to platinum and palladium's plummets. Amongst other points therein, these were included:
* Gold pushed higher in flight-to-safety buying as investors worried about wider financial market health - traders.

* Gold's relative strength when compared with steep losses in industrial metals, including platinum and palladium, made its moderate gains seem even stronger - traders....

* Gold's upside was limited as the euro fell to a near four-year low against the dollar and as many investors' need for cash outweighed their desire to stash that cash in a safe asset like the precious metal - traders.
In and of itself, this last item may explain why gold rose above $1,200 in later afternoon: the stock markets recovered, as did the Euro.

To sum up, the metal put on a good show today despite some headwinds remaining. There may be another pullback as June approaches, but recent action suggests that it'll be met by bargain hunting. The traditional slow season for gold may not be that bad after all; certainly, its recent fate has been much better than platinum's and palladium's.

Special Note/Thanks: Mid-afternoon, this blog's visitor count reached 10,000. [It's located on the left just below the "About Me" section.] I'd like to thank everyone who's stopped by, especially the regulars, for making it happen. I couldn't have done it myself...they check.


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