Thursday, June 10, 2010

Gold Takes Tumble, Recovers Somewhat

Gold didn't move much at the start of regular trading, but began to move down in a two-stage decline that took its price well below $1,220. With U.S. stocks opening sharply higher, there was less reason to hold gold and some reason to get out of it. When the decline halted, just before 10:00 AM ET, the metal had bottomed at $1,214.30. Rebounding, it then entered a range between $1,218 and $1,220 until rallying just after 11:00. Spiking to almost $1,226, it pulled back to settle around $1,222. As of 11:51 AM ET, the spot price was $1,222.60 for a loss of $10.50 on the day. The Kitco Gold Index attributed -$20.85 to predominant selling and +$10.35 to weakness in the greenback.

The U.S. Dollar Index did weaken further, breaking below its early-morning low to sink down to just above 87.0. After its low as of 10:00, the Index rebounded a little to reach 87.2. Since then, it fluctuated in a range bordered by those two values. As of 11:53 AM, it was at 87.14.

As optimism returns, gold has continued to fall. Still well above the bargain level, the metal is nonetheless approaching it. Afternoon trading will show if the late-morning rebound has put an end to the declines.


Update: Although there was a continuation of the recovery rally at 12:15, the declines didn't end; another one hit an hour later. After reaching an early-afternoon peak of a little above $1,226, the metal spent the rest of the pit shift declining. The 1:15 spill left the metal at just above $1,220, after which it sunk a little more. At the end of the pit shift, or 1:30, the spot price was $1,220.00 for a drop of $13.10 on the day. The Kitco Gold Index assigned -$22.50's worth of change to predominant selling and +$9.40's worth to greenback weakness.

The U.S. Dollar Index managed to rise above its morning range, but only a little. A gentle rally got the Index up to 87.27, after which it slowly drifted downwards. As of 1:35, it was at 87.21.

Evidently, the late-morning relief rally didn't have staying power. As the good times come back, for the nonce, gold continues to lose some of its immediate appeal. There may be an arrest to its current decline in the electronic-trading hitch.


Update 2: As things turned out, there wasn't. The U.S. equity markets resumed their climb, making the safe-haven trade even less attractive. Although the post-pit decline was uneven, with a mid-afternoon relief rally, it was there.

The decline that started late in the pit shift continued when the electronic-trading hitch began; it didn't end until 2:00 PM ET, when gold touched $1,216. A reaction rally that lasted an hour took the metal up to $1,220, but it gave way to another stage in the decline that almost made another daily low. Stopping at $1,215 just before equity trading ended, the metal then entered into a range between $1,216 and $1,218. Ending near the top of that range, gold closed at $1,217.70 for a drop of $15.40 on the day. The Kitco Gold Index attributed -$26.80 to predominant selling and +$11.40 to greenback weakness. The two changes sum up to the raw change on the day.

As for the U.S. Dollar Index, it slumped as well in an uneven decline that ended right at closing time for U.S. equities. Managing to sink below 87 as of 4:00, after a drop that was rather ragged, the Index inched up above 87 but failed to make 87.15. As of 5:30 PM, it was 87.095.

Its daily chart, from Stockcharts.com, shows today's decline as being more serious than that of the last two days:



The Index made short work of the 87.5 support level. I have to say that I had no inkling of the decline in advance. It pushed the Index's RSI value, found on the top of the chart, to well below overbought levels - and it also pushed the MACD lines at the bottom into a bearish configuration. The switch-over from bearish to bullish lasted three sessions.

The current short-term decline has not threatened the overall bull trend, as the Index was fairly overextended recently. It does, however, make the last run look like a panic top. The recent ascending-triangle formation that pushed the Index up above 88.5 after completion looks like something of a blow-off top, because the greenback-enhancing pressure on the system has come off.

That said, the Index may not have much farther to go. Its RSI value is approaching neutral, a level where the declines tend to stop. All it would take is another fear-based driver to see it move up again.

As for gold, its own daily chart shows a similar decline:



Like the U.S. Dollar Index, gold has endured a third down day in a row; gold's MACD line has also gone from a bullish configuration to a bearish one today. Unlike the Index's, gold's barely entered into a bearish crossover. Its RSI value is close to neutral.

Also, like the Index, gold is now showing some technical weakness for this reason: divergences in both the MACD and RSI levels. When the metal's last record high was made last Monday, both its RSI lines and MACD lines peaked at lower levels than they were as of the last record high. I admit to not interpreting this divergence properly when it cropped up earlier this week; in hindsight, it did indicate that gold was due for a bit of a tumble (as did a similar divergence for the Index.) If the current decline pulls gold down to $1,200, then there'll be some reason to believe that the intermediate-term uptrend is coming to an end.

What would provide a floor, unless sights are lowered, would be bargain-hunting. If the short-term decline is not arrested, then that force will kick in should $1,200 be reached.

A post-pit Wall Street Journal report ascribes today's decline as prompted by renewed optimism for global growth.
"The risk trade [is] unwinding a little bit," said Michael Gross, broker and futures analyst with OptionSellers.com....

Also hurting gold, Chinese foreign-exchange regulators said Thursday that the metal's market is too small, illiquid and volatile to be considered suitable for asset allocation for the nation's nearly $2.5 trillion foreign-exchange stockpile, according to a Reuters report.

The news "helps to set aside discussions on China being an imminent buyer," said Jim Steel, a metals analyst with HSBC in New York.
That thumbs-down, coming overnight, had a carry-over effect in the regular trading session.

It could be that the regulators in question are talking gold down prior to a move into the metal, but the comments can be taken at face value. Gold is volatile, and the market for it is much smaller than that for the Euro - let alone T-bonds. If there is a talking-down motive, then its aim is to get the price down. At any rate, the PRC government has shown a preference for buying up domestic production.

As the week nears its end, the signs for gold don't look all that great. In retrospect, last week's buying panic fit the template: pushing prices up in a frenzy, it pushed them up too far too fast. Should the decline continue tomorrow, though, it'll get the metal close to bargain levels.

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