God Whipsaws In Morning Trading

Again, gold whipsawed after making a run early on in regular trading. This one was less volatile than yesterday's: the peak was reached at only $1,218.30 this time, but the bottom was $1,203.00. The peak took place at just before 9:00 AM ET after the gold market took heart despite some disappointing June PPI data. A dropping greenback provided the driver, but the effects of the 0.5% drop in the raw PPI sunk in after the peak around 8:50. A recovery in the greenback added to the drop. So did news of the Philadelphia Fed's manufacturing index falling to 5.1 instead of rising to 10 as expected.

The low in gold was reached just after 10:15. Subsequently, with a renewal of the U.S. dollar's decline, the metal pulled off its lows. A jump around 11:10 got gold back up above $1,210; that recovery held. As of 11:54 AM, the spot price was $1,210.40 for a gain of $1.90 on the day. The Kitco Gold Index attributed -$9.30 to predominant selling and +$11.20 to weakening in the greenback.

The U.S. Dollar Index, after falling to just above 82.6 as of 9:08, steadied and then recovered to above 82.75 before declining anew. The drop halted at 82.5, and the Index recovered to 82.6 a little before noon. As of 11:56, it was at 82.60.

Gold went through a wild pit-session ride for the second day in a row, as conflicting signals and the volatility of the greenback added hopes and fears to the market. Still, it's in its short term range; it'll likely stay there in the afternoon.


Update: Due to a recovering greenback, gold fell below $1,210 right at noon ET. Continuing to drop, it bottomed at around $1,208. From there, it fluctuated between that level and $1,209.50 for the rest of the pit session. $1,210 reamined out of reach in early afternoon. As of 1:30, or the end of the pit session, the spot price was $1,208.00 for a loss of $0.50 on the day. The Kitco Gold Index assigned -$11.90's worth of change to predominant selling and +$11.40's worth to greenback weakness.

The U.S. Dollar Index, as indicated above, continued that pre-noon rally until it got well above 82.7 around 12:30. After hovering around that level until just before 1:00, it first tumbled and then slipped back down to 82.5 before the decline was replaced by a modest upturn. As of 1:30, the Index was at 82.57.

The trading's been choppy, but gold is pretty much staying where it is. There's still a chance at a gain at the close if the electronic-trading hitch co-operates.


Update 2: The metal did close with a loss, but with the smallest loss possible: a dime on the day. Its performance during today's electronic-trading hitch was quite similar to yesterday's. Again, the metal fluctuated in an interday range between $1,206 and $1,210; that same interday range was established in the middle of yesterday's hitch and held 'til the end. So did today's, even though it prevailed since noon ET. At the close, spot gold was at $1,208.40; as already mentioned, the change on the day was -$0.10. The Kitco Gold Index attributed -$14.90 to the predominant-selling category and +$14.80 to the weakening-greenback one. Both categories sum up to the raw change on the day.

The U.S. Dollar Index, after getting above 82.6 shortly after the last Update, double-topped and resumed sinking. After a pull-up, the drop was fairly steady all the way down to 82.28 as reached around 4:25. Following that low, the Index first dithered and then pulled up a bit. As of 5:30, it was at 82.37.

Its daily chart, from Stockcharts.com, shows its slide continuing with a certain robustness:



The 83 level did give way in what has turned into quite the extended decline. Again, a short-term recovery peaked at a lower high and gave way to a lower low. Needless to say, the Eurocrisis premium is all-but gone from the greenback.

There may also be another factor. Remember the dollar carry trade from 'way back when? Last year, some institutions took advantage of the then-falling greenback by borrowing a haunch at miniscule rates and then selling them for a currency enjoying higher yields. The proceeds were invested in that other currency, giving a positive carry on the trade. The prudent ones forward-purchased greenbacks at the time to lock in a guaranteed repayment price and used high leverage to earn a fat return on a thin differential. The less-then-prudent ones waited a bit for the greenback to fall further before locking in a greenback forward purchase or futures contracts. As long as the greenback kept falling, there was added gravy for the carry trade. The re-purchased greenbacks could be had for less, adding to the margin.

It works great until the greenback starts rising. Then, the interest-rate differential starts getting eaten by the fall of the other currency in U.S. dollar terms. The fully-hedged prudent carry-trade players escape unscathed, but the less-than-fully-hedged ones find themselves in a bit of a spot. The latter is going to be tempted to cut the losses and buy back the greenbacks from another source ASAP: "unwinding" the trade early. Neither player will likely re-up, removing a source of selling pressure in the U.S. dollar. Part of the reason for the the greenback bull trend that had started last November was the unwinding of the U.S. dollar carry trade.

That carry trade might be back, even though there aren't many high-rate opportunities in the other major currency zones. (A large depositor can get more than 2% in a UK bank.) At any rate, the greenback's performance is more felicitous for the carry trade now. I wouldn't be surprised if said trade were already re-appearing.

Turning back to today's performance, the doldrums were further illustrated by the Index's RSI value (found at the top of its chart) going well below the 30 oversold level. Today's was just above 27. Given this oversoldness, the possibility of the Index making a short-term rebound is there.

As for gold, its own daily chart shows the market quieting down as it stays stuck in its short-term range:



$1,219 is still the formidable barrier that it was, but $1,200 is no longer fallen through. The interday span has indeed narrowed.

As of now, there's no indication that gold will move out of its short-term range. The greenback's fall hasn't been enough of a driver; it hasn't even been a consistent one. The current range-boundedness shows there's no internal bullishness to push the price up substantially and no real bearish edge to push it down. So, a new driver will have to show up to push gold out of its lassitude before the range gets broken.

A post-pit Reuters report says gold ended essentially unchanged as weak economic data and mild outside markets failed to either inspire or scare. Amongst the points made therein, these were included:

* Gold pared initial gains after reports showed that new U.S. claims for jobless benefits tumbled last week, manufacturing slowed and industrial production rose but just barely.

* Gold has been largely treading water this week after news that a 346 tonne gold swap operation conducted by the BIS stirred fears of gold dumping.

* Higher allocation by institutional investors including wealthy retirement plans and larger institutions boost gold prices to new highs - Robert Lutts at Cabot Money Management....

* Any surprise from a U.S. consumer inflation report due on Friday could provide new catalyst to bullion - traders.

It's a nice hope, but today's producer prices index report indicates that any such rise would be little more than a blip.

Gold's still in its holding pattern and looks like it's going to stay there. Tomorrow may see an upwards bump, but current action suggests it will be short-lived.