Gold Drops In Mid-Morning Trading, Nearly Recovers In Afternoon

Ben Bernanke's morning speech had the usual effect on U.S. equity markets, although the players also took heart from an encouraging mainland Chinese export surge in May as indicative of continued global recovery. Inflation in Brazil has slowed, and traders there are betting that it'll continue to be contained. With this backdrop, particularly the former item, gold languished and then fell. The greenback also continued to slump.

After dawdling in a ragged range centered around $1,233, the metal endured a decline that started at 10:50 AM ET and took twelve dollars an ounce off the price. Bottoming at $1,222 as of 11:10, the metal then rebounded above $1,225. Profit-taking was one reason, but the upbeatedness of the day was another: U.S. equities got on a roll shortly before gold dropped. Bernanke's encouraging words for the U.S. economy took their toll on gold.

As of 11:48 AM, after the metal finished rebounding to the $1,226 level, the spot price was $1,226.20 for a drop of $8.60 on the day. The Kitco Gold Index attributed -$16.30 to predominant selling pressure and +$7.70 to a weakening greenback.

The U.S. Dollar Index, after recovering somewhat just before 9:00, continued to drop. Initially hesitent, the drop accelerated at 10:45 as greenback bulls also lost heart because of Bernanke's words. Bottoming at 87.42 as of 11:08, in a near-contemporaneous drop alongside gold, the Index churned just above that level and then began a small recovery rally. As of 11:53, it was at 87.57.

Gold's "bad-news bull" status is currently getting the better of it as hope and optimism are returning to the equity markets. That counterpoint might continue this afternoon if equities keep on rolling upwards.


Update: The recovery from the mid-morning drop continued, although slowly. After pulling back just before noon, gold slogged up to reach $1,230 before pulling back a little again. At the end of the pit shift, or 1:30 PM ET, the spot price was $1,228.50 for a loss of $6.30 on the day. The Kitco Gold Index assigned -$12.40's worth of change to predominant selling and +$6.10's worth due to overall greenback weakness.

After bottoming at 87.45, the U.S. Dollar Index pulled back up in a two-stage rally that got it up to 87.7 at its early-afternoon peak. Slumping back down a little, the Index was at 87.68 as of 1:31 PM.

The Bernanke boost has faded from the U.S. stock markets, and that fade has aided gold's recovery. The release of the Beige Book is coming at 2:15, which may throw the gold market for a loop...or it may not. (The last release didn't.)


Update 2: The Beige Book did have an influence, albeit indirectly through the U.S. stock market. Ben Bernanke testified that economic activity was stronger in all twelve Fed districts, although growth has been "modest." He said that growth wasn't strong enough to change course for the time being: the near-zero interest rate policy (ZIRP) will continue in place for "an extended period." Despite the growth story, the markets interpreted his words badly: from strong gains, the averages all moved into losses. Added worries over the Euro amplified the drop. The gold market interpreted Bernanke's remarks favorably, as the continued ZIRP means there's near-zero opportunity cost to hold gold. There's also an inflation kicker, as the period may be extended enough to ramp inflation up. However, these factors are largely priced in. More directly, gold benefitted from increasing safe-haven demand: trouble in the stock market, and renewed Euro-related concerns, made the metal look more attractive.

Hence the recovery in mid- and later afternoon trading from the high 1220s, where gold had dawdled before the release of the Beige Book. Veering in to $1,228 until 2:45 PM ET, the metal rallied to $1,234 in a three-stage climb that ended just before equity markets closed. A pullback prefaced a final run that ended at $1,235, leaving the metal in the gain column very briefly. Another pullback at the end of regular trading left it with a small loss. As of the close, the spot price was $1,233.10 for a decline of $1.70 on the day. The Kitco Gold Index attributed -$4.10 to predominant selling and +$2.40 to overall weakness in the greenback. The two changes sum up to the raw change on the day.

The U.S. Dollar Index also benefitted from the reversal in stocks as it continued to recover in mid-afternoon. Its advance turned into a crawl-and-stall at 3:00, though. By that time, it had reach 87.9. Subsequently, it tried to break above 88 but topped out just below that level; after that try, it sunk back to the 87.9 level. As of 5:30, the Index was exactly 87.9.

Its daily chart, from Stockcharts.com, shows a decline that touched 87.5 before attenuating:



As its RSI line at the top of the chart shows, it's no longer overbought. Despite today's decline, the Index's MACD lines are still in a bullish configuration. The latter suggest that today's decline was a dip, and that the current uptrend is still rolling. The greenback's latest boost has come from trouble signs for the U.S. economy, not the Euromess, so a renewed uptake of optimism may cause it to dip further. However, the later-afternoon fretting over the Euro might get its rally rolling again if the worry continues and spreads.

Gold, as shown by its own daily chart, is going through a dip of its own:



After making a new record high in the midst of a buying panic, it's not that much of a surprise. Panics abate, and cannier players assume (rightly, for the most part) that the panic-driven buying drove the price up to higher than what it should be. So, the interday decline to almost $1,220 isn't all that much of a surprise. Gold's MACD lines stayed in a bullish configuration for a third day in a row, suggesting that the current short-term decline is more of a pause than a foretaste. Unlike the U.S. Dollar Index's, the metal's RSI hasn't ramped up to overbought levels - even when the latest interday record was made. Buying panic there has been in European bullion-coin markets, but the panic has not spread into the overall spot market.

Given the skepticism this latest phase of the rally has called forth, gold's in a fairly good position. As has been the case during the entire intermediate-term bull run since April, the metal has rallied when its RSI level approaches neutral. The last record-topping short-term rally was more sedate than the last one. I can't forecast turns, but there is a good chance that gold will forge ahead into new record territory soon.

As for the decline earlier in the day, today's post-pit Reuters report ascribes it to profit-taking and Bernanke's earlier, more optimistic comments. Amongst other points made therein, these were included:

* Gold pressured as safe-haven demand dissipates after U.S. Dow Jones industrial average briefly recoups the 10,000 level - traders.

* Comments by Bernanke about gold's sending a different signal in response to inflation when compared with other assets prompted bullion investors to lighten positions - traders.

* The metal's inability to hold the important $1,250 level on Tuesday sparked a great deal of concern - Dennis Gartman, publisher of the Gartman Letter.

* Underperforming gold equities seen bearish as bull markets in the precious metal eventually lead to bull markets in gold mining stocks, but that has not happened - Gartman.

That last point made by Gartman fingers one of the reasons why gold timers have been so skittish lately.

Speaking of gold and Ben Bernanke, the Wall Street Journal blog "Real Time Economics" references him as saying he's somewhat perplexed by the recent gold rally:

Federal Reserve Chairman Ben Bernanke says he’s a bit puzzled by surging gold prices. The 30% rally from a year ago, on top of gains in previous years, might be interpreted as a loud signal from markets that big inflation pressures are building in the U.S. Gold is seen by many investors as a hedge against inflation risk....

Inflation expectations as measured in Treasury Inflation Protected Securities (TIPS) markets remain low. And other commodity prices are falling. Gold is breaking records, but copper prices are down 17% so far this year.

“I don’t fully understand movements in the gold price,” Mr. Bernanke admitted. But he suggested it might be another example of investors fleeing risky assets and flocking to assets that are perceived as less risky, not only Treasury bonds, but also ones like gold.

That's one interpretation. Another is that the gold market is more perceptive than the bond market at spotting inflation down the road. A third is that gold is reacting to future global inflation, not just the U.S.'s. Of course, a fourth is that gold players are kidding themselves and the bond players are right about inflation dormancy. There are others, such as gold acting as a crisis hedge despite U.S. inflation being dormant right now.

Whatever the reason, Bernanke has signalled that he doesn't consider the gold price to be that relevant a time series in rate decisions. Rather than seeing a portent, he sees a puzzle. In this case, ignorance is better for gold than knowledge: a central banker casting the rally as irrational means (s)he doesn't see any warning about too-extended periods of low rates being flashed. All told, it's better for gold if Bernanke and others see a deflationist bond market. If inflationists turn out to be right, as they were with respect to Greenspan's now-infamous 1%, the bond market is in for a surprise.

More immediately, gold's recovery may not continue in the overnight session. Another driver is needed, as gold seems tired out right now.