What Went Up, Came Down And Partially Recovered

Unusually for recent times, the slump at the beginning of regular trading catalyzed a plummet that visited gold mid-morning. Unlike the ones that afflicted the gold market earlier this year, this morning's was drawn out over a little more than an hour. Despite that relative stretch, it still took off almost thirty dollars an ounce. The momentum is now working the other way.

After hovering when regular trading began, gold slipped down about four dollars an ounce around 8:40 AM ET. Recovering to about $1,247, it slid down to $1,245 a half and hour later. A drop at 9:45 was reversed.

Then, at 9:50, the avalanche decline began. Accelerating in the next hour, it slammed gold down to $1,217.00 before it finally abated just after 11:00. Subsequently, the metal bobbed at just above that level before entering a rally mode. As of 11:35 AM ET, the spot price was $1,226.50 for a loss of $6.10 on the day. The Kitco Gold Index attributed +$3.70 to predominant buying and -$9.80 to U.S. dollar strength.

A concerning aspect of this rally is the fact that gold plummeted while the U.S. Dollar Index kept rising to a new thirteen-month high. Starting below 85.5 as of 9:00, the Index climbed rapidly and fairly steadily until it reached just below 86.25 as of 11:25. A reversion to the more usual inverse relationship between gold and the greenback, given the latter's run, wouldn't be all that good for the metal. As of 11:49, the Index had pulled back a bit to 86.12.

I admit that I didn't see the plummet coming, but momentum-driven markets are at risk of those plummets for reasons that no-one can really see in advance; avalanche declines of that sort are auto-catalytic, which makes then unpredictable except at the general-warning level. It may be portentous, or it may be shrugged off as another healthy correction; the metal may have just fallen out of bed. Gold's subsequent action, including this afternoon's, will show the aftereffect.


Update: Although the pull-up had a similar magnitude to a relief rally, it doesn't look like one. After falling back down, the metal bottomed at a higher level than the bottom of the plummet itself.

That rally, which began just after 11:00, didn't stop until it reached $1,237 just before 12:15 PM ET. In total, it retraced two-thirds of the mid-morning plummet. Gold then fell, but that drop began declerating once it reached $1,230. Bottoming above $1,125 around 1:00, the metal inched up afterwards. At the end of the pit shift, or 1:30 PM, spot gold was at $1,227.90 for a loss of $4.70 on the day. The Kitco Gold Index assigned -$9.30's worth of change to a strengthening greenback and +$4.60 to predominant buying.

The U.S. Dollar Index pulled back below 86 prior to recovering to above that level. The decline mentioned above continued until 1:05, when it bottomed out at 85.8. Since then, it pulled up until pausing around 86.1. As of 1:40 PM, it was 86.08.

Most likely, the rest of the afternoon will be quiet. As the week winds down, the electronic-trading shift after the pit's closed tends to see gold adrift. There is a little upwards momentum thanks to the recovery from the plummet, but it's not likely to have much of an effect on the rest of the day's trading. It should be enough, though, to pull the metal above $1,130 at the close. There's an outside chance of gold ending in the plus column.


Update 2: Although it looked like the metal was going to for a while, gold didn't close with a gain. But, thanks to a trading range that got established a little after 2:00 PM ET, it went and stayed above $1,130. At the end of the last trading day this week, the metal was left with a miniscule loss.

After the volatile pit shift ended, gold was in the high 1220s. Climbing up to $1,230 by 1:45, it slumped back to the high 1220s at 2:00. From there, it pulled up and eventually carved out a range between $1,230 and $1,235. After getting close to the top of the range just before 5:00, the metal sunk back and closed a little above range's bottom. As of the close, it was at $1,231.40 for a loss of $1.20 on the day. The Kitco Gold Index (KGX) attributed +$11.00 to predominant buying and -$12.20 to strength in the greenback. Thanks to the former component, the KGX had gold ex-dollar set another record high today.

It was the fourth week in a row for gold to show a weekly gain. Last Friday, spot gold closed at $1,208.00 Today's gain left the metal up $23.40, or 1.94%.

The U.S. Dollar Index, subsequent to a mid-afternoon drift, climbed for the rest of the week. Although interrupted, the climb was enough to get it up to a new thirteen-month closing high of 86.30. It's now the Index that looks and seems unstoppable.

Its daily chart, from Stockcharts.com, shows the momentum is still strong at the end of its fourth up session in a row:



Again, the Index's RSI value is in overbought territory; in fact, that value is the highest it's been since late October of '08. However, it was higher in August and Septenber of '08 when the Index itself was much lower. This two-year chart shows both the differences and similarities between then and now:



If there's any period that the Index's run-up now is similar to, it would be August's. The move now is more attenuated than then, but the renewed rally from a slighly less than overbought value has the stamp of the late-August rally that carried over into September. That said, the pattern this time 'round is shorter and less powerful - which means it carries less potential for a sickening pullback like that of late September-early October. I note that the Index has bested a resistance level that confounded it three times, back in late March, April and May of '09. A little more of a run and it will be at levels not seen since March of last year. Should it go above 87, the next major resistance level (88) is one that confounded it back in '08. That said, it's still in the hands of the chaos god.

The daily chart for gold shows its volatility today, both on the upside and downside:



As evident at the top of its own chart, gold's RSI number is still in overbought territory. The new interday record high is shown in the top wick, while the mid-morning spill is shown by the bottom wick. The body, which shows the difference between the open and the close, is miniscule. The metal's partial recovery from the morning plummet, although it erased more than all of gold's early-morning gains, shows that there is some resilience even in the teeth of an all-out plummet. It looks like the short sellers are holding back as of now. After a powerful rally like this month's, they don't move in unless there's little doubt that the run is over. Evidently, that's not the case today.

The Commitment of Traders graph for the metal shows its open interest continuing to expand; another year's record was made. As of last Tuesday, when gold had reached its highest close of the week, both non-commercial and commercial longs expanded. The former category was up 6.54%, while the latter category was up 11.0%. It's unlikely that the commercials would be speculating alongside the non-commercials; the most sensible reason is they bought as agents, to meet outside demand. Non-commercial shorts, a relatively small fraction of the short contracts outstanding, jumped up by 13.6%. Commerical shorts, the largest category of all of them, was up 6.54%.

Moving back to the U.S. Dollar Index, its own CoT graph shows that its open interest actually shrunk. As of last Tuesday, the Index had been through the first day of its four-day bull run. All reportable catgories shrunk. The most startling shrinkage, of 38.3%, was in the non-commercial short category. The ones who got out, did well to do so at that time. The next three days saw the Index rally strongly.

The end-of-week post-pit Reuters report explains the mid-morning drop in gold as being caused by options-related and selling out of need for cash. Amongst the points therein, these were made:

* Investor risk appetite drops because of lingering Greek debt contagion fears and economic uncertainties - traders.

* Margins-related selling hit the metal as investors tapped into liquid gold market for cash due to equity markets' sell-off - Bill O'Neill at commodities firm LOGIC Advisors.

* Investors take profits after the metal rallied sharply to record highs this week due to uncertainty that a European rescue will be effective - analysts.

* Sizable sale of put options by a trading house triggered options-related selling in gold futures - COMEX gold floor trader Jonathan Jossen.

The two selling sources built on each other, and in part were triggered by strapped traders using gold as a piggy bank. No mention of short sellers was there, nor of any momentum selling.

As the week ends, despite gold looking toppy, it's fared fairly well. Traders using gold profits as a means of raising ready cash for losses elsewhere, bent but didn't break gold's momentum. There are bound to be slips in a rally that starts at near-overbought levels, and this morning's was one of them - but the plummet didn't seem to do any lasting damage to the uptrend. If gold drops more durably next week, it'll be because of other factors.

In closing, thanks for reading what I've posted and written in this blog. Enjoy your weekend.