Gold Sinks In Early Morning Trading

When evening trading started, gold drifted around where it had closed yesterday. Reaching $1,240 around midnight ET, it got as high as $1,242.60 around 1:30. Then, it slid down in the next few hours to reach $1,231.50. Recovering to almost $1,240, it slid back down in a climate of dropping stock prices. This morning, dropping stocks and stock futures did not lend a boost to the metal overall; any such boost was counteracted by strength in the U.S. dollar. As of 8:07 AM ET, the spot price was $1,235.70 for a drop of $3.40 on the day. The Kitco Gold Index attributed +$2.55 to predominant buying and -$5.95 to a strengthening greenback.

The U.S. Dollar Index managed to get above 86.0 after trading sideways with a slight upward bias last evening. The run upwards started at 2:00 AM, and lasted until 4:25 when the Index reached almost 86.2. This time saw gold take its early-morning drop. Since that run, the Index has stayed in a range between that same 86.2 and 86.05. As of 8:15, it was at 86.11.

A Bloomberg report, as webbed by Business Week, said further profit-taking was driving gold down.

Gold is “likely to remain vulnerable to further pockets of long liquidation or profit taking in the run-up to month- and quarter-end,” said James Moore, an analyst at TheBullionDesk.com in London. “With Chinese growth concerns surfacing and European Union default fears on the rise, we expect investor dip-buying to provide further background support.”

The report also mentions a double downer from Asia: the PRC Conference Board is forecasting weaker growth for mainland China, plus the Japanese employment rate rose to 5.1% and consumers tightened their spending. The article also notes the holdings of the SPDR Gold Shares Trust were unchanged yesterday.

A Reuters report said earlier gains were limited by a stronger greenback.

"Both times gold reached $1,260 over the last week it has been instantly hammered $30-$35 lower," said Ole Hansen, senior manager at Saxo Bank.

"The focus seems to have shifted back toward the strong dollar/weak commodity relation. This has increased the risk for a deeper correction," he added. "If support at $1,224 is broken it could get a bit ugly."

[G]old is entering a seasonally weak period for physical demand which could undermine any push higher, analysts said.

"June-August are the months in which demand for gold retreats," said Societe Generale in a note. "Along with the onset of the vacation period in North America and Europe, the Indian market slows significantly."

"The average difference in tonnage (consumption) between the second and third quarters 2000-2008 was 41 tonnes," it added.

The article also notes other commodities have weakened, leading to a sympathetic fall in gold itself.

A Wall Street Journal report ascribes the fall to the disappointing growth data from mainland China.

A downward revision in Chinese leading economic indicators and disappointing Japanese economic data pushed down stocks and pushed up the U.S. dollar. Strong euro-zone consumer and business-confidence data steadied markets....

"Technically, [gold]'s looking a little heavy," said Tom Kendall, a precious metals analyst at Credit Suisse in London. "The speed of yesterday's move was discouraging for those who were trying to pick the bottom."

However, safe-haven support for gold remains relatively firm on corrections. Swedish bank SEB Tuesday said gold could benefit from worries over the expiry of the European Central Bank's €442 billion ($542.51 billion) bank-funding program.

The opening of regular trading saw a zig-zag, with gold falling below $1,230 just before 8:30. Reversing, it climbed up to $1,238 before stalling. As of 8:56 AM, the spot price was $1,237.30 for a loss of $1.30 on the day. The Kitco Gold Index assigned +$3.30's worth of change to predominant buying and -$4.60's worth to greenback strength. The U.S. Dollar Index fell slightly, getting a little below 86.0 before recovering to just above that level. As of 8:59, it was at 86.02.

So far, gold's performance has not been encouraging - but that's par for the course when range-bound. Any recovery today is likely to be muted.