Monday, May 10, 2010

Gold Struggles To Best $1,200

After starting off in the lower 1190s, gold clambered back up to the $1,200 level in the morning. The opening of regular trading came in the middle of a recovery from $1,183.20, reached just after 4 AM ET. The metal has been unusually volatile as it climbed; it sometimes dropped five dollars an ounce while struggling upwards. $1,200 was pierced a couple of times in morning trading, but unsustainably. As of 11:45 AM ET, the spot price was at $1,196.20 for a loss of $11.80 since last Friday's close. The Kitco Gold Index assigned $17.70's worth of change to predominant selling, little more than half of what that figure was when regular trading opened, and +$5.90's worth to weakness in the greenback.

The latter figure also shrunk, due to a recovery in the U.S. Dollar Index which took it above 84 after the post-Eurobailout euphoria began to fade. After rallying before 9 AM, the Index pulled back to the 83.5 level until a little after 9:40. Then, it went on a strong rally that took it almost up to 94 within a half an hour. The rally became weaker and more uneven afterwards, but the Index managed to ford above 84 several times before pulling back. As of 11:48, it was at 83.88.

Some of the recovery in the metal is due to the implication of the bailout sinking in, but some of it is a reaction to overdone selling earlier in the morning. The chances of gold making a gain on the day are slim, but the metal has a shot at staying above $1,200 at the end of the session.

Update: After pulling back to the $1,195 level by 11:30 AM ET, gold climbed back up to the $1,200 level, more slowly than in the morning but also more steadily. The peak of the latest pull-up was $1,203.40, reached at 1:20 PM. As of 1:45, the spot price was $1,201.10 for a loss of $6.90 since last Friday's close. The Kitco Gold Index attributed -$9.40 to predominant selling and +$2.50 to weakness in the U.S. dollar.

The U.S. Dollar Index has managed to recover most of its ground since Friday's close. After sinking back until 12:00 PM, it turned up and managed to rally to above 84.35 by 1:20. As of 1: 47, after falling back to below 84.14, the Index was at 84.16.

One interesting aspect of today's recoveries is the concurrency effect continuing. The rallying in gold and the Index are pacing each other, as both recover from relief selling. Shifting back to gold, there's a good chance of the metal staying above $1,200 by the close.

Update 2: It did, thanks to gold entering in to a trading range bordered by $1,204 on the upside and $1,200 on the downside. Unlike the rallies earlier today above $1,200, this one was not all-but reversed.

Despite the post-crisis plummets in both gold and the greenback at the start of trading, both of them retraced most of their losses. Although gold did so hesitantly until this afternoon, the metal put on more than nineteen dollars an ounce all told from its daily low of $1,183.20. There was some hesitation in late morning when it came to pulling up above $1,200, the metal eventually made it. Interestingly, it did so despite the U.S. stock market averages keeping almost all of their post-bailout-announcement gains.

As indicated above, gold stayed in a trading range for the rest of the afternoon. $1,200 was hardly breached, although touched; $1,204 was overcome once, briefly, just before 3:45 PM ET. That upside breach led to the day's high of $1,205.20. Despite the staying power shown after the pit shift this afternoon, spot gold still closed with a loss at $1,202.70, above the midpoint of its post-pit range. The loss was $5.30 since Friday's close. The Kitco Gold Index assigned -$6.10 to predominant selling and +$0.80 to weakness in the greenback; the two figues sum up to the overall change since Friday's close.

The U.S. Dollar Index drifted upwards for the rest of the day, although not without pullbacks. The biggest rally and pullback came between 3:05 and 4:05; at the end of its round trip, the Index was only slightly higher than it was at the beginning. Interestingly, the peak came at the same time that gold made its own daily high. From 84.15 as of 4:05, the Index trundled upwards to close at 84.29 as of 5:30.

Its daily chart, from, shows the post-bailout-announcement letdown but also the day's recovery:

The day's drop overall had the effect of bringing the Index's RSI line, found at the top of the graph, down from oversold levels - but just barely. Given the pulling away of the main Eurocrisis driver, at least for now, the Index's pullback isn't unexpected. Based on how it's acted after previous phases of the Eurocrisis have ebbed, a further decline is likely. There's also another kicker that may pull the Index down in future: the Fed announcement of a credit line to ship U.S. dollars to the European central bank. Ostensibly, it's for lending purposes; but, the last time such a facility was offered in October of '08, the Index ended up taking a tumble. Not immediately, but after the crisis had cleared. The two-year daily chart of the Index makes for a interesting comparison between now and October '08; both periods can be found by looking at the most recent green-coloured areas on the RSI line part of the chart:

Although the magnitude of the move is less than the one in '08, there is a parallel given the crisis-and-bailout backdrop. October's TARP was followed by churning until December, when the Index plummeted. The Eurobailout seems a far more comprehensive measure, so the Index isn't likely to repeat the second rocket-up that early '09 saw. Despite the recent positive correlation between gold and the Index, a drop in the latter should help the former down the road.

Speaking of gold, its own daily chart shows the post-bailout profit-taking followed by recovery that turned a serious decline into a mild one:

Gold's decline today also brought its RSI line down from the 70 oversold level. I note, in part out of wet-blanket duty, that in its bull phase gold didn't have a solid run upwards until its RSI value had fallen to about 50. That said, its recovery could extend tomorrow. Strange as this may sound, there is a parallel on the charts between the last four sessions and the six trading days after the February 4th plummet. I don't want to stretch the comparison too far, because Feb. 4th put gold deep into bargain territory; May 4th's drop didn't. Still, there's enough similarlity for a possible extension of this morning and afternoon's recovery rally. I don't think that such a rally would last long, though.

A Reuters report ascribed the recovery from the metal's 2% drop to handicapping the inflationary potential of the bailout package.
The metal fell as low at $1,183.85 in early trade as the package boosted risk appetite, lifting stocks, commodities and the euro. However it later pared those losses, briefly rising back above $1,200, as dollar weakness also helped prices....

"Today we are seeing a reversal of previous safe-haven flows," said Tobias Merath, an analyst at Credit Suisse. "The medium-term consequence of what is going on is probably easier monetary policy."

"Monetary tightening was on the horizon, and now this is likely to postponed," he said. "That is positive for gold, as interest rates are opportunity costs for non-yielding assets."...

Again, the elephant in the room - a possible Fed rate hike - appears like it's not going to do any damage to the metal's price anytime soon. Certainly, the chance of a European central bank rate hike is slim to none.

As I said above, gold may have a good day tomorrow but it's still overbought. There's still the risk of a pullback, and it is May. A draining of Eurocrisis demand would be consistent with gold going in to its summer doldrums starting later this month.

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