Gold See-Saws, Then Tumbles

Regular trading opened with a rise in gold to $1,219, which was followed by a wavering and then a descent back to $1,215. A further rise brought the metal up to almost $1,220, but the run melted away with another drop to $1,215. The see-sawing continued to the middle of the $1,215-$1219 range, until the support was finally exhausted. Starting at 11:25 AM ET, the metal tumbled down to $1,211 before pausing. As of 11:45 AM, the spot price was $1,211.80 for a loss of $12.20 on the day. The Kitco Gold Index split the loss into -$8.50 for predominant selling and -$3.70 for a strengthening greenback.

The U.S. Dollar Index, after some hesitation, climbed up to around the 87 level. Positive U.S. economic data, like the ISM service-sector report that showed both continued expansion and job growth for the first time in 28 months, helped boost the Index is its run to 87. After reaching that level as of 10:30, the Index fluctuated in a trading range bordered by 86.9 on the downside and 87.05 on the upside. As of 11:46 AM, the Index was at 86.97.

Unless there's a real recovery later in the day, gold will have notched up its second loss in a row. $1,200 has easily held so far, and is likely to continue to do so later, but the safe-haven demand has evidently drained from the market. Short sellers may be picking up on it now.


Update: After the bounceback, which lasted until 12:15 PM ET, the plummet continued. In the next fifteen minutes, ten dollars was sliced off the price; gold ended up testing $1,200 after all. Having bottomed at $1,200.10, the metal bounced back up fairly steadily in the next hour but not enough to reach $1,210. As of the end of the pit shift, the spot price was $1,208.10 for a loss of $15.90 on the day. The Kitco Gold Index divided the overall loss into -$9.20 for predominant selling and -$6.70 for greenback strength.

The U.S. Dollar Index managed to make it well above 87 as it built on the rally that regained steam at 9 AM. Initially bumping against 87.05, the Index forded above at 12:05 PM. Making it to 87.25, it paused and consolidated around the 87.15-87.2 level. As of 1:38, it was at 87.16.

Due to those two plummets, my call for a gain today turned out to be wrong. The gold market day showed a vulnerability that's reminiscent of the declines late last month. How far it goes today will be shown by the electronic-trading hitch of the regular session.


Update 2: The metal never recovered from its drop. After spending some time between $1,206 and $1,208, it dropped briefly below right after 4:00 PM ET. Staying a little below for an hour, the metal recovered to the top of the range and ended up closing at $1,207.80 for a loss on the day of $16.20. The Kitco Gold Index divided the loss into -$9.30 for predominant selling and -$6.90 for strength in the greenback.

The U.S. Dollar Index held on to its gains made earlier in the day, but didn't add to them all that much. Dipping down to 87.05 as of mid-afternoon, the Index recovered to sail up a little above 87.25 only to be stalled there. After a slight dip, it ended up at 87.21 as of 5:30.

Its daily chart, from Stockcharts.com, shows today's candlestick hugging the top of its range:



So far, the Index is sticking to the ascending triangle pattern. If that formation plays out, it'll rise above 87.5 and go for a nice run upwards. Further troubles in the Eurozone, or elsewhere, would likely be the driver for it.

That's what might happen. Despite a lull, and a return of risk appetite that took a bite out of the gold price, the Index keeps inching up. It'll face a bit of a battle to get and stay above 87.5, but that's the way it appears to be going. I could be wrong on this one, so I have to hold a demur in reserve. If the Index gets and stays above 87.5, then it's in for a nice continued run. The only point of doubt on this picture is the RSI line, which is close to being at an overbought level. Being near-overbought doesn't prevent a run of that sort, but does limit it in the near term.

As for gold, its decline today put the x-mark on my prediction yesterday that it would rise. Instead, it had a fairly large decline, as its own daily chart shows:



Needless to say, the approach of its MACD lines to a bullish crossover was aborted today; both lines are now solidly in a bearish configuration. Gold's own RSI level is now only a little above neutral. Short term, the top at the beginning of this month was lower than the one for the middle of last month.

It's possible that this lower high may foreshadow a lower low, but it's unlikely. Sharp declines do scatter bargain hunters, but they tend to come back. The current intermediate-term rise has been accompanied by acclimatization to higher prices. Bargain hunting now tends to click in only a little below $1,200. As of now, even if the decline continues, it looks like a short-term dip not unlike the one late last month. There's little evidence of a turn-away from gold.

Still, the metal could slump down to below $1,180 or even below $1,175 in the near future. I can't make any recommendations on this blog, but I note that the last short-term decline ended largely because of bargain-hunting. It would take quite an air pocket to make bargain hunters ratchet down their entry points; the Eurocrisis still echoes.

The post-pit Reuters report ascribed the fall to anticipation of U.S. economic improvement, to be shown in the payrolls data tomorrow; it prompted an exit from the metal. Amongst other points in the article, these were made:

* After a robust U.S. factory orders report, and several readings on Thursday indicating that employers have been adding jobs, some gold investors sold off positions in anticipation of a surge in the monthly payrolls data on Friday -analysts.

* In response to the robust U.S. economic news, the dollar was up against the euro, also pressuring gold.

* An absence of renewed concerns over the euro zone debt crisis also dulled gold's edge as a safe haven -- traders.

So, the negative correlation between gold and the greenback was felt today as the Eurocrisis lulled. The influence of a recovering U.S. economy does explain why gold was driven down more strongly during the lull than the greenback. The article does not mention any short-seller influence, leaving the impression that today's plummets were caused by selling cascades by longs. Such a cascade may have been caused by tight stops, or by quick-fingered momentum sales; either would be an invitation for short sellers to step into the breach had it not been for the bargain-hunting factor. Perhaps the shorts are weighing in, despite shorting becoming more dangerous in April and May.

The metal could continue to soften tomorrow, but underlying physical demand still seems robust. This factor might kick in and give gold a breather on its last session of the week.