Tuesday, July 20, 2010

After Drop Below $1,180, Gold Climbs To Gain

The bottom of the day, $1,174.80, was reached just before regular trading began. Despite a couple of pullbacks, gold has climbed up since the pit session began. The first up-leg was accelerated by the dismal housing-starts number, which showed a drop of 5% in the face of expectations for a drop of only 3%. After that leg was over at about the time the equity markets opened, gold had reached $1,185. A slate of disappointing corporate earnings helped push down the major averages, which added to the gold rally; so did a pullback in the greenback. By the time the second up-leg was over, around 11:15 AM ET, the metal had touched $1,194.70. A second pullback left it near $1,190. As of 11:56, the spot price was $1,189.80 for a gain of $5.70 on the day. The Kitco Gold Index attributed +$7.30 to predominant buying and -$1.60 to overall strengthening of the greenback.

The U.S. Dollar Index, after making a double top around 83.1, slid a fair bit until a relief rally set in. The slide started as of 9:20 and lasted three hours, largely mirroring the second leg of gold's advance. As of 11:57, the Index had pulled up from its 11:15 low of 82.625 to reach 82.72.

Gold is still well below $1,200, but bargain hunting has moved from the physical market to the overall spot market. The downward reaction may continue, but the metal's in a position to keep a gain on the day by the close.


Update: $1,190 ended up holding. After touching that level, and scraping alongside it for two brief periods, the metal rose above it and began fluctuating around $1,192 as the pit session veered to an end. At that end, or 1:30, the spot price was $1,192.30 for a gain of $8.20 on the day. The Kitco Gold Index assigned +$9.25's worth of change to predominant buying and -$1.05's worth to overall greenback strength.

The U.S. Dollar Index, after the relief rally went all the way up to 82.785, rolled over but stabilized around 82.7. As of 1:30, it was at 82.69.

Gold is now in a fairly strong position all told; the rally held for the rest of the pit session. There's a good chance of the metal closing above $1,190, and a stong likelihood of a daily gain.


Update 2: It did close above $1,190, well above. Gold hardly moved in the electronic-trading hitch, largely staying above $1,182 until the end. As of the close, the spot price was $1,192.20 for a gain of $8.10 on the day. The Kitco Gold Index apportioned the gain into +$10.10 for predominant buying and -$2.00 for strength in the greenback. The two categoreies sum up to the raw change on the day.

The U.S. Dollar Index finished right around 2:00, when it reached about the same level it bottomed at late this morning. After that double bottom followed an interrupted pull-up that got it above 82.8 before another interruption set in. As of 5:30 PM ET, the Index was at 82.775.

Its daily chart, from Stockcharts.com, shows yesterday's slight rise continuing today:



Today's interday low was a little above last Friday's, and the high was better than any day's since last Thursday's tumble. There has been a short-term upturn, although the most likely cause is the Index being oversold over the last two days. Today, its RSI level (found at the top of its chart) got above the oversold level of 30 but not by much. The upturn may have a little run left, but there's no real indication that the Index is due for a real turnaround. Given the relative good news that's come out of Euroland, a lot of the current downturn is due to the crisis premium evaporating. Even now, it's still way above its early-December low.

In order for the Index to have any real chance of meeting that low, to sink into the high 70s and even beyond, the currency markets would have to reward austerity programs as part of a genuine theme...and the besotten governments of Euroland would have to stick with their budget cuts. I think it's safe to assume the U.S. government will not pursue any serious austerity program.

Turning to gold, its own daily chart shows a lower interday low despite the solid recovery in regular trading:



The body of today's candlestick is almost beside yesterday's, with the different-colored body indicating a reversal. It took some time for bargain-hunting to re-emerge in the overall spot market, but emerge it has.

Since the bargain hunting tends to tail off when the price approaches $1,200, there's no guarantee that any serious momentum has been built up even though buyers are looking favorably on evidence of another slowdown in the U.S. economy. The way things look now, there'll be more bad economic news coming. Should the gold market feed off that, the seeds will be planted for another upwards run. If not, then the metal will likely hang around the bargain range. Needless to say, the Eurocrisis premium is gone.

The summer doldrums continue, but today's performance shows there are limits to it.

A post-pit Reuters report ascribed today's rally to technical buying and worries about the U.S. economy. Amongst the points therein, these were included:
* Strong technical buying at below key support level
$1,175-1,180 and short covering lifting August gold - Sean Lusk at
PFGBest.

* Gold prices supported after data showed U.S. housing starts hit their lowest level in eight months in June.

* Independent investor Dennis Gartman said in a Monday note that he has halved his gold holdings after recent selling.
Regarding Gartman, a question needs to be asked: is his selling rational risk management, or is is capitulation? (Is it both?) The way the market took it suggests capitulation, if only from a short-term perspective. Evidently, he sees no driver on the horizon to push gold up.

Despite that lack of overall bullishness, there's still firm support at just below today's closing levels. Bargain hunting lives, and will continue to do so unless the gold market is poleaxed. Now that the Eurocrisis premium is basically gone, there's no poleaxe visible that would cause it. Only technical selling would do so, and that's likely to have only a short-term effect.

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