Monday, June 21, 2010

Gold Slides Down, Then Tumbles

Gold's latest record was made well before regular trading began. Starting at 8:00 PM, the metal sunk from the low 1260s to the low 1250s. At first tumbling, gold's decline was slower and more punctuated by rests as the pit session continued. The $1,251.30 low on the day was made just before 10:30, making the subsequent action a possible recovery. As of 11:54 PM ET, the spot price was $1,252.70 for a loss of $3.50 on the day. The Kitco Gold Index split the loss into -$2.95 for predominant selling and -$0.55 for strengthening in the greenback.

The U.S. Dollar Index, after rallying to 85.75, stopped its climbing and settled into a range between 85.53 and 85.65. Given its tumble early this morning, the Index has been left in a fairly strong position. As of 11:56 AM, it was 85.61.

So far, the gold market has seen a bit of a letdown from its recent highs. Becuse there haven't been any flare-ups, or other drivers that would push the price up, the pullback isn't that surprising. All told, it's been fairly mild and it may be ending. Afternoon trading will show if it will.


Update: It didn't; instead the decline intensified. The metal's relief rally ended shortly after noon ET. Resuming its slide, it got to just above $1,250 by 12:45. Then, it underwent a tumble that drove its price down more then ten dollars in the space of five minutes. Pausing, the metal bobbed between $1,240 and $1,242 before the decline resumed once again. As of the close of the pit shift, or 1:30, the spot price was $1,238.90 for a loss of $17.60 on the day. The Kitco Gold Index split the loss into -$13.35 for predominant selling and -$4.25 for greenback strength.

The U.S. Dollar Index underwent a small but solid rally that started at 11:40. After getting ahead of itself by rising up to 85.90, it pulled back but then climbed up to about the same level. As of 1:35 PM, it was at 85.85.

Gold's early-afternoon decline was unexpected, with the only immediate explanation being an air pocket engendered by the rise of the greenback. The decline may be shaved now that the electronic-trading hitch has begun, but indications suggest a relief rally for now.


Update 2: As it turned out, the indications were not to bear fruit. There proved to be more dropping in store for gold: the $1,229.80 bottom wasn't reached until 4:00 PM ET. Unusually, gold fell with the U.S. stock market today as the latter descended from its elevated open.

The earlier tumble turned into a more regular drop after the pit session ended, with the first significant relief rally coming a little before 3:00. Moving up almost five dollars an ounce, the metal then fell to its low as the relief-rally gain vanished. The second bottom, though, proved to be close enough to a double bottom to act like one. In subsequent trading, the metal stayed within a $1,230-$1,235 range; the end of the day saw gold in the middle. As of the close, the spot price was $1,232.60 for a loss of $23.90 on the day. The Kitco Gold Index divided the loss into -$17.30 due to predominant selling and -$6.60 due to a strengthening greenback.

Continuing its ascent, the U.S. Dollar Index managed to climb above 86 in a two-stage rally during early-mid afternoon. Reaching a peak of 86.04 around 3:45, it then fluctuated between that level and 85.925. As of 5:30, it was at 85.96.

Its daily chart, from Stockcharts.com, shows a nice rally today:



It came, though, at the end of a downtrend that took the Index down to 85.0. That's slightly below the level at which it bottomed back on May 21st. The Index has not exactly been oversold, but its RSI line has dipped to a level at which other short-term bottoms have been made. That line, found at the top of the chart, is now almost exactly at the neutral level.

Assuming that today's low marks the end of the recent short-term decline, as I am, the next rise bears close watching. If the Index can't get above 88, let alone 87.5 or so, then it's in the midst of carving out a head-and-shoulders reversal that should lead to a further drop below 85. Not yet, as there's some scope for a relief rally, but in time if it can't rally above 88. The clime seems right for a drop of that sort, as the Eurocrisis storm winds have faded for now. The next rally has a good chance of being a relief rally.

As for gold, its own daily chart shows today's large tumble coming on the heels of another new record:



I didn't expect a tumble of this sort, but I did warn on Friday that the completion pattern should be interpreted cautiously because there was no driver behind it. What can be made by market internals can be unmade by market internals.

Surprisingly, gold's MACD lines (found at the bottom of its chart) still show a bullish configuration. The metal bottomed near its short-term low as of June 10th, but it's still above that low. These facts don't mean that gold is going to shake off today's decline and keep rolling upwards. Jewelery demand is seasonally weak around this time, backing up the summer-weakness rule of thumb. That weakness hasn't prevailed so far, but it still has its influence.

More to the point, both the Index and gold have seen the same bullish chart formation - an ascending triangle - fizzle not long after each's completion. The Index's started to fizzle on June 8th, and gold's fizzled today. The two had this in common: there was no driver, like there was earlier in each's fear driven runs, to keep pushing each higher. The lack of follow-through is an indication that the Eurocrisis has gone into a slow burn. It looks like the same fear that pushed both up will not flare again anytime soon. Sad to say, but the Eurocrisis trade looks like it's over for now.

That said, gold looks like it's going to flounder around at this level. Essentially, it's back in its range.

A post-pit Reuters report, ascribing the earlier rally to euphoria over the PRC moving to an upvaluation of the renminbi, said gold was driven down by heavy profit-taking. Amongst the points therein, these were included:
* China's vow to allow a flexible yuan stirred economic optimism, lessening gold's safe-haven appeal.

* Gold's dramatic rally to China's news seems overdone, triggering heavy profit-taking - Bill O'Neill at LOGIC Advisors.

* Euro's 0.5 percent losses against the dollar prompted a pullback in crude oil, pressuring gold prices.

* Sentiment positive as global central bank gold reserves rose 276.3 tonnes in the first quarter of 2010 to 30,462.8 tonnes, with Saudi Arabia more than doubling its reported reserves - World Gold Council.
So, the profit-taking ball got rolling and turned into a snowball. Presumably, there was selling on the news that cascaded when it became apparent that there was no new driver and little buying enthusiasm. The momentum changed, leading momentum traders to bail out. The recovery of the greenback may have had an influence on the snowballing, seeing as how the traditional negative correlation between the two has reappeared.

If profit-taking is all that's behind the tumble, then gold should be calmer tomorrow - in which case it's likely to remain range-bound. Bargain hunters are still there, and should cushion any fall that isn't an all-out rout. In fact, bargain seekers may show up in the overnight session if they're convinced that today's tumble was just a spill.

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