Tuesday, May 4, 2010

Strong Greenback Finally Drags Gold Down

In contradistinction to my complacency early this morning, gold has plummeted after shooting up to well above $1,190. When regular trading began, the metal was building on an early-morning rise that had taken it up to $1,190. By 8:50 AM ET, it had hit its daily high of $1,193.30.

Initially, the subsequent plummet was merely a downturn; by 9:30, the metal was still above $1,188. Falling below $1,185 shortly afterwards, gold hovered around that level until a decline got rolling that started slowly at first. Accelerating, it pushed gold down to $1,167.20 by 11:05. Then done plummeting, the metal began climbing back up. As of 11:42, the spot price was $1,173.90 for a loss of $8.40 on the day. The Kitco Gold Index attributed -$11.90 to strength in the greenback and +$3.50 to predominant buying.

The U.S. Dollar Index continued its climb, which finally overwhelmed gold. Largely uninterrupted, the Index sailed easily above the 83 level to veer close to a new 12-month high. As of 11:43, after pulling back from its peak above 83.25, it was 83.16.

Needless to say, there's no chance that gold will reach $1,200 today. The normally negative correlation between the metal and the greenback finally caught up with gold. Also having an influence was profit-taking - not to mention a conviction that the early-morning gain had pushed the metal up too far.

Update: The decline didn't stop with the morning. After recovering to the $1,175 level just before noon ET, gold hung there until 12:20 when another decline hit. When through, as of 12:45, it had erased about eight dollars an ounce and had left the metal at $1,166.20. Since that drop, gold fluctuated between $1,167 and $1,170. As of 1:42, the metal was at $1,171.90 for a loss of $10.40 on the day. The Kitco Gold Index assigned +$1.90 for predominant buying and -$12.30 for strength in the greenback.

After its morning peak, the U.S. Dollar Index sunk back down a bit. Reaching 83.1 by 12:00, it undulated between that level and 83.175 before making another run at 83.25. This run didn't quite make the morning high; it peaked at 83.24. As of 1:44 PM, the Index was at 83.22.

Unless something untoward takes place, gold should be finished dropping for the day. It's not likely to rise all that much, either; a close between $1,170 and $1,175 is in the cards.

Update 2: It closed within the middle of that range. As is often the case, not much happened in the electronic shift of regular trading.

With the exception of the U.S. dollar, the markets were hit hard today as worries about contagion from Greece spread. (They made for quite a contagion themselves.) Gold did not benefit all that much from those worries, as panic-trade buyers went back to the greenback. Ex-dollar, the metal did benefit somewhat but not enough to take away its loss on the day.

The morning plummet was another one of those air pockets, which seemingly had disappeared as gold rallied upwards. Enough shorts had been burned, or inconvenienced, to make them cautious recently; the old rules seemed to have been upset. That newfound caution indicates that this morning's plummet was triggered by profit-taking and amplified by stop-loss hitting and momentum traders pulling out manually. Some shorts may have benefitted, but they would have had to have been pretty nimble. The ones that were, would have had to have been primed by yesterday's gain melting away for a time. Given that gold made a new 2010 high early this morning, an exiting-long cascade was more likely. It may have been delayed selling on the bailout-agreement news.

For mid- to late-afternoon trading, electronic, the metal first underwent a relief rally that ended at 2:00 PM ET. It set up the higher border of a $1,170-$1,173.50 trading range in which it spent the rest of the regular session. The metal closed in the upper-middle part of that range, at $1,172.20 for a loss of $10.10. The Kitco Gold Index (KGX) assigned -$15.20' worth of change to a strengthening greenback and +$5.10' worth to predominant buying. The latter made for a very unusual day: despite the morning plummet, the KGX for gold's performance ex-greenback made another record closing high today. Yes, another record - indicating that some safe-haven buying did enter the gold market, which was swamped by the greenback's.

The U.S. Dollar Index got off to a slow start, but it rallied for the rest of the session. From 3:20 PM to 5:30, the rally was almost completely uninterrupted. As of 5:30, it closed at 83.51: close to a one-year high. Had it been next week, there would have been one at that close.

Its daily chart, from Stockcharts.com, shows yesterday's rally turning into a much stronger one, as the short-term muddling resolved into quite the rally:

The Index's RSI line, found at the top of the chart, is now in oversold territory. The last time that happened definitively was on February 4th; the Index continued upwards for another day before pulling back. There's a good chance of a similar continuation tomorrow. The closing value on the chart is for the end of the pit shift, and the Index rallied more afterwards. A closing at the daily high, as indicated by the wickless candlestick corresponding to today's action, is a sign of strength that is likely to continue. Plus, the backdrop of the rally - the Eurocrisis - still has some fear potential. Any difficulty from, say, the German legislature in approving it will put more upward pressure on the greenback. I'm sure every trader remembers how the original TARP legislation was voted down in '08. There might be some handicapping of a similar fate with regards to the Eurobailout and the German legislature, even if it's a less likely outcome due to greater independent-mindedness amongst U.S. legislators than amongst the German variety.

Should it go through, there may be some profit-taking - but the vote is scheduled for Thursday at the earliest. There's also the potential for trouble from Portugal or Spain tomorrow. If the Spanish government gets into the same fiscal crisis, there won't be enough IMF money to hand over a comparable bailout package.

All of this mess has done wonders for the U.S. dollar, but it had also given gold a hand up. Today, though, gold's own daily chart shows its drop at the end of a volatile day:

Given the rise of the last three days, today's pullback doesn't look all that bad. The length of the lower and upper wicks show the volatility. All told, the short-term uptrend is still intact so far. Gold's own RSI value came close to oversold yesterday. Its MACD lines at the bottom of the chart are still in a bullish configuration, as shown by the histogram which they overlay. This morning's plummet may have opened the eyes of some active short sellers, but they're likely to be cautious at first.

Plus, there's that rule of thumb that's still in play: when panic time comes, traders tend to reach for the dollar before gold; gold comes later. Granted that the two rose simultaneously for a time, and not today. The lack of concurrence doesn't obviate the older rule from working.

Gold may drop again tomorrow, but there's little cause to worry about the uptrend unless the price sinks down to around $1,140. Today's close is well above that level, and it came after a doozy of a day. More encouraging would be the metal hardly moving tomorrow, which may happen if today's drop squeezed out the weak hands for the nonce.

A post-pit Wall Street Journal report attributes today's drop to risk aversion surfacing.
During initial trading Tuesday, investors bought into gold as a "safe haven" amid worries that cash-strapped Greece won't be able to meet fiscal austerity measures demanded by the EUR110 billion bailout package announced over the weekend.

The continued rally in the greenback--with the ICE Futures U.S. Dollar Index hitting a one-year high--proved too strong for some gold market participants to stomach, and they began to book profits, sending June futures all the way down to an intraday low of $1,166.90....

The seesaw moves in gold on Tuesday come as the metal shifts away from trading as a risk play, returning to its more traditional role as an investment seen retaining value in times of crisis.
The article also mentions similar drops in the other precious metals.

All in all, today's decline can be seen as an overbought market righting itself. The greenback certainly had an influence, and it could be argued that the U.S. dollar's rally merely masked continued strength in gold. Tomorrow's trading, particularly during the pit session, will bring a clearer picture of gold's vulnerability.

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