Wednesday, July 21, 2010

After Pre-Regular Pop-Up, Gold Gets Choppy; Sinks After Bernanke Testimony

Gold got off to a good start before regular trading began, pushing up to almost $1,200 at the 7 AM ET peak. Since the start of the pit session, it's been in a choppy pullback. Starting regular trading at almost $1,197, the metal slid down to $1,192 before turning around and rising to about $1,196. Right after, as of 9:45, the metal had dropped down to $1,190. Another pull-up peaked at a lower price, this time $1,194. Since then, the metal's pulled back but $1,190 has not been breached. The choppiness could be pegged to uncertainty about Bernanke's testimony to a Senate committee, plus gold reacting inversely to the greenback. As of 11:58 AM, the spot price was $1,192.60 for a gain of $0.40 on the day. The Kitco Gold Index attributed +$4.10 to predominant buying and -$3.70 to a strengthening greenback.

The U.S. Dollar Index managed to climb above 83, but not by much as it fluctuated between 82.94 and 83.11. Its upwaves and downwaves played off against gold's and were somewhat ahead of the metal's, suggesting the greenback was the short-term influence on gold's own fluctuations. As of 11:59 AM, the Index was at 83.06.

The metal may end up taking heart from Bernanke's words. So far, its choppiness suggests there's no reason for traders to push it beyond bargain levels.


Update: The downwardly-biased choppiness has turned into a trading range. After reaching $1,193, gold poked up above $1,194 right after 12:30 PM ET only to fall back to just above $1,191. A further recovery near the end of the pit session brought the metal back into the gains column. As of the end, or 1:30 PM, the spot price was $1,192.30 for a miniscule gain of $0.10. The Kitco Gold Index assigned +$4.10's worth of change to predominant buying and -$4.00's worth to strength in the greenback.

The U.S. Dollar Index has become range-bound too, in a more quiet fashion than gold. Staying above 83 but mostly below 83.1, its fluctuations centered around 83.07. As of 1:35 PM, it was at 83.06.

Despite the fluctuations, the only momentun for gold now is sideways. The release of Bernanke's testimony may change that, but so far the gold market isn't discounting any surprises.


Update 2: The trading range turned into a decline when Bernanke's testimony was disseminated. He said the outlook was "unusually uncertain" right now, which markets in general took as meaning a slowdown or even a double-dip. The gold and greenback markets took it as meaning deflation was a bigger worry than inflation; they acted accordingly. Discussion of the Fed possibly undertaking another quantitative easing program if necessary, as one of three options, didn't carry the day on the gold market. Nor did his continued use of the term "extended period" reagrding the zero interest-rate policy. Six months ago, a few were wondering if a rate hike would be put in place by now. Nowadays, "not until sometime in 2011" looks realistic.

Gold spent the entire 2:00 - 2:30 PM ET time period falling, ending at $1,184 after a climactic dip to $1,182.70. Despite a few attempts to get up above $1,186, the metal failed to do so and largely stayed in the $1,184-$1,186 zone despite inching above it at the end. As of the close of regular trading, the spot price was $1,186.10 for a loss of $6.10 on the day. The Kitco Gold Index attributed +$1.70 to predominant buying and -$7.80 to strengthening of the greenback. The two categories sum up to the raw change on the day.

The greenback longs liked what they heard. From a little below 83, the U.S. Dollar Index leapt up; it didn't stop until 2:35 after touching 83.45. Sinking afterwards, the Index still stayed above 83.2 before turning upwards again and then bobbing. As of 5:30 PM, it was at 83.29.

Its daily chart, from Stockcharts.com, shows that run-up as part of a nice recovery from its recent doldrums:



No more is the Index near oversold. Its RSI level, found at the top of the chart, is almost half-way between oversold and neutral. Unlike yesterday's gain, today's was fairly substantial. Bernanke's testimony was the driver today, but something like it would have pushed the Index up anyway because of previous oversoldness. Despite the extent of the gain, the Index is still in a short-term uptrend in a wider downtrend. It's still too soon to say the fortunes of the greenback have changed. If the austerity theme becomes durable, then the Index will continue downwards.

As for gold, its own daily chart shows yesterday's recovery being preponderantly erased today:



A robotic reading of the chart doesn't lead to a very optimistic conclusion. The last peak was a lower high with respect to the previous one, which set a new record; yesterday's low was lower than the one of July 7th. A lower high with a lower low suggests a short-term downtrend. The 50-day moving average, the blue line in the middle of the chart, has also turned down.

The chart, I believe, has to be read skeptically at this point. Gold could continue down on technical factors influencing longs to get out, and/or shorts to get in, but the underlying demand for physical is still operative at these levels. The overall spot market doesn't always pick up on that source, but the demand is still there and will increase if prices fall further. This fundamental factor, I believe, will trump any technical factors. There's already a rising chorus of analysts (who are permitted to issue buy and sell recommendations) saying this period makes for a buying opportunity. Also, there's seasonal weakness to consider. The renewed talk of deflation is eating away at the gold market in part because of that seasonality. As of now, when extra-chart factors are considered, gold looks like it's in a holding pattern.

A post-pit Reuters report says gold closed the pit session flat, but was reeled by the testimony. Amongst the points therein, these were included:
* Market consolidation seen after a significant technical reversal pattern on Tuesday - Scott Meyers at Pioneer Futures.

* Federal Reserve Chairman Ben Bernanke's comments about U.S. economy facing "unusually uncertain" prospects take a toll on futures prices after COMEX settlement. Wall St down 1.5 pct.

* A 6.1-tonne fall in holdings of the SPDR Gold Trust (GLD), the biggest one-day decline since December, hurts investor confidence.

As indicated, there was a confidence damper even before the testimony. Gold held up well nonetheless, and may show a rebound tomorrow. If not, its visit to the bargain zone will continue.

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