Friday, May 28, 2010

Gold Takes A Dive, Recovers

The chart of the spot price for today shows an upside-down bowl, whose peak came about two and a half hours before regular trading began. As has been the case for several days, the metal fell around the time when regular trading began. Unlike those past days, though, there wasn't an upswing later. Instead, the early-morning dip proved to be the first of three that took the metal down to $1,202. The downleg that began at 9:00 and ended an hour later took the price down by more than eight dollars an ounce; it was interrupted by the release of the University of Michigan's consumer sentiment index for May. Rising, the inflation-expectation component showed consumers expect prices to rise at a faster rate than now. The relief rally that began shortly after 10:00 took the price up to $1,209, but it too gave way for the third leg that took the price down to $1,210.40. As of 11:50 AM, after the third leg had exhausted itself, the spot price was $1,206.00 for a loss of $6.00 on the day. The Kitco Gold Index split the loss into -$4.60 for predominant selling and -$1.40 for a strengthening greenback.

The U.S. Dollar Index managed to pull itself up out of its early-morning doldrums. Beginning to rally around 8:30, the Index pushed unevenly up to slightly above 86.5 before stalling there between 10:55 and 11:35. Afterwards, a pullback sent the Index below 86.4. As of 11:51, it had slumped to 86.32.

Gold's momentum evaporated this morning, although $1,200 has held so far. A late-morning recovery did set in, but $1,200 may still be tested in the afternoon.

Update: It wasn't. Instead gold recovered almost all of its morning losses.

The exhaustion of the morning decline at $1,202 ended up being a double bottom as a three-stage rally set in. Initially staggered, the rise turned into a minor rocket-up right before the pit shift ended; it pulled gold up into the plus column. As of 1:30, the spot price was $1,213.20 for a gain of $1.20 on the day. The Kitco Gold Index assigned +$5.70's worth of change to predominant buying and -$4.50's worth to greenback strength.

The U.S. Dollar Index, after slumping down to the 86.2 level, managed to pull up to a new morning high. Breaking above 86.65 in a five-minute rocket-up at 12:40, it stayed comfortably above 86.5. As of 1:31, it was at 86.59.

As it turned out, the later-morning recovery was delayed into the early afternoon. Gold has a chance of closing with a daily gain, although a slight loss on the day is more likely.

Update 2: The driver that caused gold to recover as it did, was Fitch's downgrading of Spanish sovereign debt one notch from AAA to AA+. That ignited the same Eurocontagion fears, which helped reverse the metal's losses earlier this afternoon.

The aftereffect was strong enough to keep gold up for the final stretch of the week's trading. Its early-afternoon run topped at $1,214, after which the metal meandered between that level and a little above $1,212. Demand in the later afternoon was enough to push it up a bit, above the $1,214 level, and the metal ended the week at $1,214.30 for a gain on the day of $2.30. The Kitco Gold Index attributed +$9.40 to predominant buying and -$7.10 to strength in the greenback. The two changes sum up to the raw change on the day.

For the week, gold did reverse the losses suffered during the previous week. From last Friday's close of $1,177.00, this week saw a gain of $37.30 or 3.17%. The five-day rally more than reversed the previous week's decline.

The U.S. Dollar Index also benefitted, to the point where the Fitch announcement could be timed by it. That rocket-up between 12:35 PM ET and 12:40 was followed by a continued drift-up that pulled the Index above 86.75. As of the end of the week, it was at 86.78.

Its daily chart, from, shows it still in its range:

Had there not been the downgrade, the Index might have fallen down a bit. Its daily low, as shown in the lower wick of its candlestick for today, got below 86.

Also, the Index 's MACD lines have crossed over into a bearish configuration. As shown on the bottom of the chart, the lines' crossover wasn't that much in magnitude. Given the greenback's overall bullish trend, their bearish crossover likely portends an extended muddle-down rather than an all-out downturn. The fact that the Eurocrisis is still hanging over the markets indicates that, if the Index is destined to fall, it likely won't fall far.

As for gold, its own daily chart shows the morning slide that was reversed by the unexpected Fitch downgrade:

The lower wick on gold's candlestick for today shows, like the Index's does for it, that the downgrade was a game-changer that prevented both from sliding further. This afternoon's jolt may result in further upside momentum carrying through after the U.S. and U.K. markets re-open on Tuesday, but it remains to be seen if it has captured gold traders' imaginations for longer than a day. The prior exhaustion may come back.

Last Tuesday, gold was in the second day of its rally. Although it continued for the rest of the week, its strength was evaporated compared to last Monday and Tuesday's. That dividing line marked the cut-off for this week's Commitment of Traders graph for gold. Total open interest fell from the elevated levels seen the previous two Tuesdays. Both categories of non-commercial contracts, longs and shorts, shrunk: the latter dropped by 13.6%. Given that gold was close to being routed from Wednesday to Friday before last, the net covering made some sense as the market rebounded. Commerical longs shrunk as well, as did commercial shorts.

The Index's CoT graph shows a further shrinkage of open interest over a timeframe which contained volatility but overall range-boundedness. Commercial longs hardly shrunk, while non-commercial longs dropped by 8.63%. Commercial shorts shrunk by 8.09%, while non-commercial shorts increased a little. Based upon the traditionally savvier players in the market, the Index was expected to head into a run of trouble. It actually didn't, but its earlier rises were stymied.

A post-pit Reuters report highlights the driver that kicked up both the Index and gold. According to it, the Fitch cut knocked the Euro down and prompted a category of gold trader we haven't heard much about recently - short sellers - to cover their positions ahead of the holiday weekend. Amongst other points made therein, these were included:
* Gold barely nudged higher in late business and edged up a bit more in after hours when the euro and U.S. share prices extended losses after Fitch downgraded Spain's debt - traders.

* The Fitch rating agency downgraded Spain's credit by one notch late in the session, saying the country's economic recovery will be "more muted" than the government forecast, due to its austerity measures.

* "I think everyone knew this was coming anyway. We all know that Portugal, Spain and Italy are the next weak links in Europe. So, the reaction was already built into (gold) prices," said David Lee, precious metals trader at Heraeus Precious Metals Management in New York.

* With rollovers out of June futures mostly complete, month-end plays sorted out earlier this week, and many players biding their time before the holiday weekend, trade was fairly quiet all day - traders.
The volatility of the day was accentuated by the low volume.

Today was the last trading day of May for the U.S. and U.K. markets. As June approaches, so does the season where gold is likely going to be soft. Although the patten isn't regular enough to be exploited by a mechanical trading rule, there is a tendency to decline when late spring turns into early summer. Should gold buck it this year by moving to the upside, it may be part of a nice rally.

If you celebrate the long weekend, may it be a relaxing one. Again, thanks for reading.

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