Tuesday, June 22, 2010

Gold Crawls Back Up Above $1,240

Not by much, but the metal managed to climb up well above the sub-$1,235 level at which it started regular trading. Rising fairly smoothly up until 9:50 AM ET, the metal stumbled after failing to break through $1,240. Ending its sudden decline at a little below $1,236, it climbed back up and surmounted the $1,240 level but not by that much. The new U.K. government unveiled a strict austerity budget, which aimed to reduce the the U.K. goverment budget deficit to 1% of GDP by 2015.

After peaking right after 11:00 at $1,243.70, the metal fell back to below $1,240 and then hovered around that level. As of 11:52 AM ET, the spot price was $1,239.10 for a gain of $6.50 on the day. The Kitco Gold Index split the gain into +$4.40 due to predominant buying and +$2.10 due to weakness in the greenback.

The U.S. Dollar Index fell below 86 after muddling around that level. Getting up to 86.1 as of 10:36, it dropped fairly steadily afterwards. As of 11:56, it was at 85.86.

Gold did recover to above $1,140, but resistance at that level still hampers the metal from rising further. Afternoon trading may see its advance still blocked.

Update: Gold still had trouble staying above $1,240. After a pre-noon (ET) spill that took it down to $1,237, the metal climbed up to $1,241 before sinking again and bobbing around $1,240. Again, the surmounting proved to be temporary. As of 1:30 PM, the end of the pit session, the spot price was $1,239.80 for a gain of $7.20 on the day. The Kitco Gold Index divided the gain into +$6.40 for predominant buying and +$0.80 for greenback weakness.

The U.S. Dollar Index, after spending some time crawling at just above 85.8, turned upwards a little. Although still in its sub-86 range, it did show a little recovery. As of 1:30, it was at 85.91.

The $1,240 level is still putting up some resistance, although spongily. There might be another try during the rest of the afternoon, but it would take an outside jolt to do so lastingly. The market internals don't look too favourable for such an advance.

Update 2: Gold spent the rest of regular trading stuck, in a fairly wide range that spanned $1,237 and $1,241. Despite spending some time above $1,240, the metal never got that much above that number. So, it can't really be considered to have broken out of the $1,220-$1,240 range it fell back into yesterday - not as of yet, anyway. While gold churned, the major stock market averages dropped from near-even to losses of more than 1%. That decline didn't affect the gold price all that appreciably, except to help pull it from the bottom of the narrower range to the top. As of the close, the metal was at $1,238.60 for a gain of $6.00 on the day. The Kitco Gold Index attributed +$8.20 to predominant buying and -$2.20 to strength in the greenback. The two figures sum up to the raw change on the day.

The U.S. Dollar Index continued on its mildly upward path, although most of the gain was made in mid-afternoon. Moving above 86.1 as of 3:00, the Index declined a little and spent the rest of the afternoon gently rising. As of 5:30, it was at 86.14.

Its daily chart, from Stockcharts.com, shows its recovery extending for a second day:

Today's gain wasn't much of one, but the Index is now further from its near-term low. Its MACD lines, found at the bottom of its chart, are still solidly in a bearish configuration - the most bearish the associated histogram has been in the last six months. Its RSI line, found at the top of the chart, shows a value that's a smidgen below neutral. There hasn't been a breakdown in the latter that would be associated with an outright bear market, but such a breakdown would have made it oversold. It hasn't been below the 30 oversold level since early June of last year.

The Index's drop is associated - partially caused by - the recovery in the Euro. There is a chance that the Eurocrisis will flare up again, which would likely give a large boost to the Index and propel it above its earlier high of 88.5, but there's no sign of that eventuality as of yet. Given the dynamics of the Eurocrisis, gold would likely benefit as well.

The metal did recover somewhat from yesterday's drop, but not enough to put it back on the rising track:

Gold's own MACD lines are still in a bullish configuration, although barely. As noted above, it had trouble getting above $1,240 and staying there; as of now, it's still at the top of that $1,220-$1,240 range. There's a chance it might break out on the upside tomorrow: if so, then it might make another run up to record territory. So far, no driver exists that would push it much higher. To sum up, today was a day of marking time once the recovery from yesterday's tumble is factored in.

A post-pit Wall Street Journal report says that gold tumbled yesterday due to hurried selling in order to buy riskier commodity assets to play the renminbi revaluation trade. That's what turned the metal's initial run-up into a plummet. Today, the market stabilized as a result of assimilating the revaluation news.

An afternoon Reuters report ascribed today's bounceback to technical buying and hope that gold will recover:
Standard Bank analyst Walter de Wet said gold has an upward bias in the next couple of weeks due to lingering worries about Europe's overhanging debt

"After yesterday's sell-off, people thought it's worth buying on the dip. Obviously with equity markets under pressure people are more risk averse and that's supporting gold," said de Wet....

[On the other hand,] Rick Bensignor, chief market strategist at investment banking group Execution Noble LLC, noted there was no follow-through selling after Monday's bearish reversal, but a technical indicator showed the market could be overbought.

"The bullish consensus is still very high in gold. It's just universally agreed that gold's the investment to be in, so there is always a concern to some level," he said.

There is a chance that gold will continue to rebound later in the week, as some players are seeing the drop as an aberration. One reason for the quiet is the wait for the Fed Open Market Committee's Fed Funds rate decision tomorrow, and the wording that will accompany it. Gold might get a boost from ZIRP as usual, but the players seem to have already anticipated it. We'll find out tomorrow.


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