Gold Tumbles Below $1,210 Overnight

There's been some relief for the Euro after it sunk to a four-year low yesterday. A decline in pessimism also pushed up European stocks and sunk German government bonds as their safe-haven appeal diminished. A similar decline in the safety trade pushed down the greenback and pummeled gold in the European stretch of overnight trading. Needless to say, gold is no longer overbought.

When the overnight session began, gold stayed steady. Pulling up slightly in the evening, it hovered around $1,225 until edging slightly upwards after midnight ET. As of just before 2 AM, it had hit $1,227.60. The tumble didn't start until a little after 2:00. Initially pushing gold down five dollars an ounce, after which a relief rally took off half that decline, the drop continued a little after 3:00. When it was finished, within a half-hour, gold was around $1,213. Hovering around $1,215 after another relief rally, the metal dropped a third time just before 5 AM, reaching $1,205.80 before pulling back up to the $1,210 level. As of 8:06, the spot price was $1,210.80 for a drop of $13.30 on the day. The Kitco Gold Index attributed -$15.80 to predominant selling and +$2.50 to weakness in the greenback.

The U.S. Dollar Index didn't tumble in the same timeframe that gold did, but it did decline after failing to break through 86.5. It tried to do so three times in the overnight session as its evening rise was blocked; the last two attempts saw it reach 86.55 before falling. The last attempt gave way to a decline starting at 1:30 AM, which carried it down to 86.1 before a relief rally set in. After that rally, the Index drifted lower again; it dipped below 86 around 8:00 AM. As of 8:14, it was at 85.99.

A Wall Street Journal report ascribes the tumble to profit-taking.

[M]arket observers say the price is likely to remain well supported due to continued concerns about the debt woes among many European countries....

"Expect a slightly bearish day on [momentary] easing fear" about the Greek debt crisis and a bit of profit taking, said commodity Strategist Filip Petersson of SEB Commodity research. "This is driving investors over to more risky assets like equities," he added.

"The recent [debt] crisis has changed the game a little bit. This is a fiscal crisis. Investors don't really believe that governments have incentive to hold down inflation at time of rising debt," metals analyst Peter Dixon said.

Mr. Dixon expects gold to remain well supported above $1,200 an ounce until uncertainty about the current debt crisis in Europe clears.

The article mentions, though, that the ECB is going to sterilize the euro-zone bonds from troubled governments it bought last week. Also brought up is further EU talks to bring national budgets under control.

A Reuters article takes up the increasing risk appetite theme.

Concerns that the fiscal problems of debt-laden Greece would occur elsewhere in the euro zone drove gold to a record $1,248.95 an ounce last week and knocked other assets. That situation has since reversed, analysts said.

"Gold was definitely in overbought territory, because people were afraid," said Commerzbank analyst Eugen Weinberg. "Fears were fueled by problems surrounding the Greece crisis. (But) at the moment risk appetite is coming back to the market a little."

"The dollar is weaker, and the gold price as well, because they were both seen as safe havens and until recently profited from this status. With the return of risk appetite, it's logical that they are both under pressure."

Despite the weakness yesterday, the holding of the SPDR Gold Shares Trust increased 3.05 tonnes yesterday to 1,217.11 tonnes.

The morning Bloomberg report, as webbed by Business Week, tied the drop in gold to a rise in European equities.

Gold “could be at risk to a correction as risk appetite begins to improve,” James Moore, an analyst at TheBullionDesk.com in London, said in a report. Still, the increase in ETF holdings and bar and coin demand suggests “investors are still looking to diversify from fiat currencies and as a result we expect dips in gold and silver to be viewed as buying opportunities.”

Also mentioned in the report is an analyst saying that demand in Asia is draining away, due to high prices; Dennis Gartman is quoted as saying that the long-gold trade has become too crowded to make him confortable.

The April PPI data for the U.S. economy were released, and they showed a 0.1% drop due to food and energy costs dropping; the core rate was up 0.2%. April housing starts were up 5.8% to an 18-month high, but building permits fell 11.5%. Both sets of data were good for gold, which rose a few dollars after their release subsequent to dropping a couple just before regular trading opened. As of 8:53, the spot price was $1,211.80 for a change of -$12.30 on the day. The Kitco Gold Index assigned -$14.40's worth of change to predominant selling and +$2.10's worth to a weakening greenback. The U.S. Dollar Index had mounted a recovery that took it up to 86.16 by 8:34, after getting a boost from the data, but that recovery tailed off. As of 8:56, it was back to 86.00.

Gold may mount a recovery effort after its early morning drop, but the declines are continuing in timeframes that normally saw advances. It looks like the metal's previous overboughtedness has caught up with it.