Friday, July 23, 2010

After Break To $1,205, Gold Tumbles

The metal made a new daily high of $1,205.00 just before the pit session began. Since then, two downfalls visited the metal. The first began right at the start of regular trading, and took gold down to a little above $1,196. The second started at 9:55 AM ET; when it ended, gold had bottomed at a new daily low of $1,186.90. The recovery in the U.S. dollar had a definite influence on the first decline and a likely influence on the second.

From that low, gold began rallying as the greenback pulled back. By late morning, the metal came close to unchanged. As of 11:55 AM, the spot price was $1,193.70 for a loss of $0.80 on the day. The Kitco Gold Index split the loss into -$0.10 for predominant selling and -$0.70 for a strengthening greenback.

That strengthening was greater earlier in the day. What started as a relief rally pushed the U.S. Dollar Index up to new daily highs, as the Euro fell because of stress-test jitters caused by a release of the test menthodology. Reaching 83.03 as of 9:23, the Index began fluctuating around 82.9 before tailing off as of a little after 11:00. During that time, gold's relief rally picked up some steam. As of 11:56, the Index was at 82.64.

Unlike yesterday's, when a dip at the start of the pit session belied a later rise, today's start-off decline in gold foreshadowed a further drop. Technical selling had something to do with the first drop of the morning, as there's not much belief in a sustainable rally above $1,200 right now. Both drops look spent, so there's some chance that gold will move to a gain in the afternoon.


Update: The results of the stress test were bled out starting at noon ET. When the tally was over, seven banks out of ninety-one failed. One was in Greece, one was in Germany, and five were in Spain. Although there have been doubts expressed about its methodology, the test has cleared the bulk of banks.

The gold market didn't like the results all that much. When the parade started, the metal tumbled from $1,194 to $1,188. An unusually large relief rally, which got gold almost all the way back up, gave way to a renewed drop that made a new daily low at $1,185.50. A second relief rally only made it to $1,190. As of the end of the pit session, or 1:30 PM, the spot price was $1,188.40 for a loss of $6.10 on the day. The Kitco Gold Index divided the loss into -$5.30 due to predominant selling and -$0.80 due to greenback strength.

The U.S. Dollar Index reversed the dip that brought it down to 85.65 and rose on the news, peaking at 82.945 as the results impacted the Euro. That rise gave way to a reversal that took the Index back down to where it was just before noon. As of 1:40, it was at 82.66.

Putting both together suggests a deflationistic intepretation, unless the players in each pit had differing interpretations. Whatever the take, the stress test release took away all but a slight chance for gold to close with a gain today.


Update 2: The electronic-trading hitch was more volatile than Friday afternoon ones normally are. After an end-of-pit dip, gold recovered to around $1,190. Slumping back a little after 2 PM ET, the metal endured two more dips; the second made for a new daily low of $1,183.90. Coming at 3:45, it marked the beginning of a recovery rally that got the metal near $1,190 before the end. As of the close, the spot price was $1,189.70 for a loss of $4.80 on the day. The Kitco Gold Index attributed -$6.50 to the predominant-selling category and +$1.70 to the weakening greenback one. Both categories sum up to the raw change on the day.

For the week, the metal clocked in another loss although this week's was much slighter than last week's. From last Friday's close of $1,193.00, the weekly change was -$3.30 or -0.277%.

The U.S. Dollar Index, after its nice morning rally, fell down to 82.4 in early and mid-afternoon. From that low, it poked up to 82.5 and stayed around that level for the rest of the session. It closed at 82.51.

Its daily chart, from Stockcharts.com, shows little movement between open and close despite a nice interday range:



Today's interday low came close to 82, and the entire candlestick shows the Index moving close to its recent short-term low. Another secondary upwards reaction is fizzling.

Still, the Index's MACD lines (found at the bottom of the chart) are getting close to each other. When the black line crosses above the red line, the indicator switches from bearish to bullish. There's no real driver to push the Index up a lot, but it has been beaten down a fair bit. A crossover could signal a secondary reaction that has more power than the recent ones, which have lasted only a few days.

As for gold, its own daily chart shows the current holding pattern continuing:



This week's candlesticks, despite the recurrent declines in the metal, show a slow upwards tendency. Today's interday low was slightly lower than that of the last decline day, two days ago, but today's interday high is above any of this week's. The gold market didn't take the results of the stress tests well, but its interday low was well above $1,180. The same can't be said for yesterday's.

With that event out of the way, the most likely way for gold to endure another significant sinking would be for technical selling to snowball. Absent that, the metal is likely to stay stuck below $1,200 but not fall much farther than $1,180. Its short-term range is solid on both ends.

Last Tuesday had the lowest interday low of the week, but the metal nevertheless managed a nice gain due to bargain hunting. That day's close marks the cut-off for this week's Commitment of Traders data, as graphed here. Total open interest shrunk for the third week in a row, but commercial longs increased by 5.29%. That category wasn't the biggest gainer of all reportable categories: non-commercial shorts was, with a quite large 27.5% jump from last week. Non-commercial longs decreased by 6.52%, and commercial shorts shrunk by 4.97%. This week, the commercial longs had it.

As of the same day, the U.S. Dollar Index was on the cusp of a strong rally that only lasted until the following day. The CoT graph for the Index, found here, shows yet another shrink in total open interest. This week's total of 28,923 contracts is the second-smallest figure for the entire 52-week period. All reportable categories shrunk except for commercial shorts, which were up marginally by 1.86%. The largest shrinkage by far was in non-commercial shorts, which dropped by 33.0%. The holders in that category have to be credited for dodging an upward jump in the Index next day, but its subsequent performance made the pullbacks seem less sagacious. As of now, anyway.

Turning back to gold, a post-pit Reuters report said gold held its ground after the release of the stress tests. Amongst the points therein, these were included:
* European stress test showed banks in Germany and Greece were seen as weak spots and in need of restructuring.

* Analysts had expected five to 10 banks to fail the test. As expected, no big banks failed the health check.

* Stress test has gone reasonably well according to assumptions, and test outcome has already been factored into gold prices - James Steel at HSBC.
Gold is still in its current range, so that characterization is right from a broader perspective despite the bumps endured by gold around noontime. At the end of the week, the metal is still holding up albeit at bargain levels. Indian demand is likely to roar back if the metal sinks as little as fifteen dollars an ounce. That source of support is likely to keep gold's current softness from becoming an all-out correction. This summer's doldrums are likely to clock in as a below-average slump for the season.

In closing, thanks for reading what I've got here. May your weekend not be blistering.

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