Tuesday, June 8, 2010

Gold Touches $1,251, Pulls Back

Regular trading began with a slump as eyes shifted to the U.S. economy. After dawdling between $1,242 and $1,243 for the first part of the regular-trading session, gold rallied as the U.S. stock market fell. Adding to the decline was remarks by Elizabeth Duke saying that the U.S. consumer may be slow to return to freer spending, deciding to strengthen their balance sheets instead; subtracting from the fear was an increase in small-business confidence and a jump in the number of job openings. Those two items helped to reverse a U.S.-equities decline that was becoming serious. Adding to the bullish sentiment for gold was a Royal Bank of Scotland report forecasting that the European Financial Stability Facility (the Eurobailout fund) will not halt the debt crisis because speculators will be able to overwhelm it if more hell breaks loose.

The sharp drop in equities helped spur the rally in gold, which started at 10 AM or around the time the U.S. averages began caving in. Within a half an hour, the metal had jumped from $1,242 to $1,251. Double-topping at that level, gold pulled back to $1,246 by 11:00; in so doing, the metal anticipated a later-morning recovery in U.S. equities. The pullback, reignited by the stock rally, managed to erase all of the earlier-morning gain as it sent the price back to $1,242. As of 11:53 AM, the spot price was $1,243.20 for a gain of $2.10 on the day. The Kitco Gold Index attributed -$4.90 to predominant selling and +$ to weakening in the greenback.

The U.S. Dollar Index, after drifting in a range earlier in the morning, did weaken just before gold began dropping back. Reaching 88.5 at 10:10, it hung just below that level before dropping to below 88.1. As of 11:57 AM ET, after recovering slightly, it turned back downwards to drop below 88: it was at 87.99.

The new record set early this morning has, so far, not been duplicated. If the stock-market picture keeps clearing at it has, the metal likely won't today. It looks like afternoon trading might get stuck at the 1240s.

Update: So far, the metal has been stuck in the mid-1240s. Ben Bernanke said that unemployment would take its time getting down, which paradoxically helped stabilize the stock market. The Euro also rose in that timeframe, making for a more plausible explanation for the stock rebound.

After sinking to $1,242, the metal rebounded choppily but fairly quickly just after noon while the U.S. stock market churned. By 12:20 PM ET, gold had spiked up to $1,248. Turning back down, it managed to bottom at a higher level than in late morning: $1,243. Another attempt at a rise petered out, leaving gold at that same level when the pit shift ended. As of 1:30 PM, the spot price was $1,243.10 for a gain of $2.80 on the day. The Kitco Gold Index assigned -$0.60's worth of change to predominant selling and +$3.40's worth to greenback weakness.

The U.S. Dollar Index showed overall weakness, but less than at noon; its afternoon recovery was substantial. Bottoming at 87.96, it managed to rally well above 88.25 in two stages. As of 1:35 PM, it was at 88.34.

Unless something bobbles it one way or another, gold is heading for near-unchanged levels for the close. It's still holding in the 1240s, and is likely to stay there for the rest of the afternoon.

Update 2: The bobble came, and it was a downward one. After drifting just above the $1,242 level, gold took a tumble around 2:30 PM ET. In about ten minutes, it had fallen to $1,234. At about that time, U.S. stocks began taking off. Rebounding to $1,238, the metal ranged between those two values until the session was over. At the close, spot gold was at $1,234.80 for a loss of $5.50 on the day. The Kitco Gold Index attributed -$11.40 to predominant selling and +$5.90 for U.S. dollar weakness; the two figures sum up to the raw change on the day.

The U.S. Dollar Index, after sinking to just above 88 by 1:00, rallied up to 88.4. Exceeding that level at 3:00, the Index shed all of its mid-afternoon gain in later afternoon. At the end of that round trip, as of 5:30, it was at 88.10.

Its daily chart, from Stockcharts.com, shows that the Index is no longer overbought:

Just barely, though, as measured by its RSI line at the top of its chart. As shown by today's candlestick, the Index pulled back a little today but stayed above 88. Its MACD lines are still in a bullish configuration for the second day in a row. Because of the Index's recent overboughtedness, a pullback isn't that unexpected - and today's was fairly slight. It might continue pulling back to 87.5, but there's nothing in today's action to indicate its bull trend is even threatened. The Index is way above both moving averages, which is indicative of a solid bull run.

I wonder how the Fed officials are taking this strength. The orthodox Keynesian theory of exchange rate movement, which I learned from my textbooks when still in university, claims that exchange rates follow short-term interest-rate differentials. The bear market of '09 could be held up as an example of that theory, as the U.S. dollar was dropping when the zero interest rate policy was in force. The trouble is, rates were also near-zero in the other major currency zones. Now that rates are being put up in some jurisdictions, like Canada recently, the U.S. dollar has managed to almost completely erase that entire '09 bear market with short rates still at near-zero. Yes, the Index is above where it was in October of '08, and is close to exceeding March '09 levels. Interest-rate differentials seems to have had little to do with it. To the extent to which Fed officials think in such terms, though, there'll be added pressure to stay the neart-zero-rate course.

Turning to gold, its new interday record is shown in the metal's own daily chart:

Although the metal did not reach an overbought level, it still took that tumble this afternoon. Despite today's drop, gold's MACD lines have stayed in a bullish configuration for the second day in a row. As pullbacks go, this one wasn't that bad.

Interestingly, from a contrarian point of view, is a gold-timer report by Mark Hulbert. During this recent run-up, gold timers have actually shied off; according to his data, timers are recommending 30.5% gold, 69.5% cash. He notes that this unusually low level "suggests that they are profoundly skeptical of gold's recent strength." From a contrarian standpoint, this says there's a wall of worry that gold's currently climbing.

A post-pit Reuters report, which was written before the mid-afternoon decline, ascribed the earlier record high to worries about the Eurocrisis stunting global growth by going malignant. Amongst other points made therin, these were included:
* Gold boosted by heightened investor risk aversion, steadily sinking euro and EU sovereign risk, which appears to be spreading to non-EU nations - James Steel at HSBC.

* Fitch credit rating agency said Britain faced a formidable challenge to cut government debt.

* Significant demand for gold was seen coming from Europe, and euro zone's problems highlighted structural credit issues elsewhere - Brian Hicks, co-manager of Global Resources Fund at U.S. Global Investors.
Presumably, gold dropped in mid-afternoon because thay risk aversion vanished. It could be that gold players moved money into U.S. equities.

If so, and if markets keep healing, the metal will continue to have some rough sledding. Still, as the Hulbert report indicated, the gold timers he surveyed are far from enthusiastic at a stage when they normally get excited. They could be right this time, because of the seasonality factor, but the contrarian odds say that gold is going to fool to the upside during June. Today's decline may carry through 'til tomorrow, but it doesn't look like it will go that far overall.

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