Monday, May 17, 2010

Gold Recovers From Early-Morning Spill, Turns Down Again

When regular trading began, gold had come off an early-morning decline which climaxed just after 8:00 AM ET at $1,123.00. The opening of regular trading at 8:20 saw a rise, initially laboured but solid. After getting up above $1,236 as of 10:00, the metal stalled and then pulled back to $1,230. Ending its drop a little below that level, it then pushed back up to $1,135 before falling again. As of 11:43 AM ET, the spot price was $1,230.00 for a loss of $1.80 on the day. The Kitco Gold Index attributed +$1.60 to predominant buying and -$3.40 to a strengthening greenback.

The U.S. Dollar Index, after slumping between 8:30 and 9:40, recovered to pull up to above 86.5 again. That slump took it down to just above 86.0, after which the Index turned up with about the same speed at which it had dropped. As of 11:38, it had pulled back to 86.49 subsequent to peaking at a little below 86.6.

So far, gold's been steady with its overall directionlessness holding up. That may change as the pit shift nears its end; its performance in early afternoon will show.


Update: The pullback that began at 11:30 AM ET, when gold was at $1,234, pulled the metal down to a new daily low by noon. At the end of that drop, before the price partially recovered, gold had sunk more than twelve dollars an ounce to $1,221.60.

The recovery was fairly rapid, if not long-lasting; by 12:10, the metal jumped to above $1,229. Dropping down again, it turned up once reaching $1,224. Subsequently, it fluctuated around $1,127 as the pit shift came to a close. As of 1:30 PM, the spot price was $1,127.80 for a drop of $3.60 on the day. The Kitco Gold Index split the loss into -$1.30 due to predominant selling and -$2.30 due to strength in the greenback.

The U.S. Dollar Index managed a rally just before noon, to 86.7, before pulling back to the 86.55 level. The top of the rally was made just after noon, and the hovering took place until a little after 1:00. Sinking below 86.5 afterwards, the Index was at 86.44 as of 1:46.

Despite that spill around noon, the overall directionlessness was still in place. Gold is likely to close around $1,230.


Update 2: Wrong I was with that guess, as the weakness in late morning returned instead of abating. Instead, gold closed close to $1,225.

The drift around $1,227 continued until 2:45 PM ET. Shortly afterwards, the metal went on a rolling but fairly steady decline that didn't end until a new daily low of $1,218.20 was made around 4:00. From that low, a relief rally first nudged the price up to $1,222 and then pushed it up to its closing value of $1,224.10; the loss since Friday's close was $7.30. The Kitco Gold Index attributed -$9.20 to predominant selling and +$1.90 to a weakening greenbak.

The U.S. Dollar Index, as indicated by the Kitco Gold Index, fell from the 86.55 level it has paused at around 1:00. The decline was fairly steady until it decelerated near the 86.15 level around 4:15. The rest of the day saw it gently descend to 86.1 before slowly recovering to drift above 86.15. As of 5:30 PM , it was at 86.16.

Its daily chart, from Stockcharts.com, shows it reaching, interday, a level that it hasn't seen since March of '09:



Today's candlestick shows a far less encouraging pattern, though: a one-day reversal. This pattern shows up when an important interday high is made, but the asset in question closes down on the day. Some versions require a outright exhaustion gap, which did not occur today for the Index. Nevertheless its fifteen-month interday high combined with its lower close today makes for a pretty good fit. The Index is also quite overbought, as shown by the above-70 RSI level seen at the top of its chart. Arguably, today's action is close enough to a one-day reversal to act like one.

That pattern foreshadows a short-term decline, and maybe one that'll last longer. Given its overboughtedness, and the continuing rally with no new crisis driver to accompany it, I believe that the Index is not going to shrug that reversal off. Unless a new driver appears, like the Portugese or Spanish government getting into a mess of its own, the Index is going to go into at least a short-term decline. I'm not calling an end to its bull market, but I am suggesting to watch out below. Its intermediate-term uptrend will not be called into question unless it goes down to 83 or below interday.

Any short-term decline in the Index is not likely to bode well for gold, whose own daily chart shows its decline extending for a third day in a row:



Although a falling greenback would cushion a decline in gold somewhat, the recent concurrency on the way up is likely to be repeated on the way down. Unlike the U.S. Dollar Index, gold's RSI is no longer in overbought territory. Its rally was less manic in U.S. dollar terms, although in Euro terms it was in the throes of a buying frenzy. Gold did make four digits in Euros, but it has since fallen back. That rise is reminiscent of the time gold first climbed into four digits in U.S. dollars back in late February of '08. Whether rightly or wrongly, a crossover into a new 1000+ record tends to motivate selling. Given that the same Eurocrisis driver is presently absent for gold as well, the concurrence between it and the greenback might well be felt by both going down.

In addition, we're in mid-May; it looks like sell-in-May rule is kicking in. Although the February-March period has seen the seasonal high in '08 and last year, with May being a rather good month, that's because May saw the end of all-out corrections in the gold price. This time, February saw an end-of-correction low and March a higher intermediate low. Unlike in February-March of one and two years ago, there was no froth this year. The froth came this month, with gold getting overbought for the first time since the end of its last rally at the beginning of December.

In '07 and '06, May did see a seasonal top after some good gains were made. Any May whose start was part of a good run in the last nine years did see a seasonal peak. If this month proves to be the exception, if gold continues to ascend in the summer, then I'll be tempted to say that it's crossed over into the bubble threshold - that it's entered the third and final stage of its long-term bull market.

To sum up, gold right now is a risky buy. The seasonality pattern suggest strongly that another correction is coming over the summer, which would make for a substantial dip for anyone wishing to buy. The Eurocrisis is currently dormant, and the buying frenzy in Europe seems to be ebbing. From the long-term perspective, such a correction would be healthy: corrections tend to drain manias before they become all-out frenzies. If such a correction does visit, and gold stays dormant afterwards, then the next long-term driver will be the big one: resurgent inflation.

Again, I concede the possibility of being wrong. If I am, and gold continues its upsurge during the summer, then we're off to the races. Another possibiility is one last burst of bullishness confounding a post-May drop starting now, but turning into one late in the month. As May turns into June, the picture will become clearer.

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