Thursday, July 1, 2010

Gold Plummets Below $1,200

It's been a bad morning for at least three asset classes, all driven down by the same cause. The three major U.S. stock averages were down about 1%, the U.S. Dollar Index fell well below 85.0, and gold plummeted down to almost $1,215. U.S. pending home sales shot down by about 30% in May, and the Institute for Supply Management's manufacturing index dropped from 59.7% for May to 56.2% for June - way below expectations for 59%. The first-time jobless-claims number, released at 8:30 AM ET, showed an unexpected increase.

Gold fell since regular trading opened, and its fall accelerated after the first two items were released as of 10:00. At first dropping below $1,235 by 9:15, the metal recovered to $1,135 and stayed there until 10:15. Then, it dropped in a steady rout that ended when it reached $1,215.10 at 11:15. The plummet over, the metal bounced up to hover around $1,220. As of 11:53 AM, the spot price was $1,218.90 for a loss of $23.50 on the day. The Kitco Gold Index attributed an unusually large -$41.80 to predominant selling and an also large +$18.30 to weakening of the greenback.

The U.S. Dollar Index also declined fairly steadily, although there were a couple of mini-routs that were recovered from later. Overall, though, the trend was solidly down. As of 11:54, the Index had recovered from its nadir of 84.71 to 84.82.

Gold and the greenback are once again positively correlated - to neither's benefit. Although the volatility on the former has been accentuated by near-holiday quietness, the plummet was still a bad one. The afternoon may see a respite.


Update: So far, it hasn't. The relief rally to $1,220 proved to be a rest stop for a continuation of the plummet. The next downleg started around 11:50 AM ET and ended as of 12:30 PM at $1,204.40. Another relief rally pulled the metal above $1,210; after it ran out of steam, the metal continued to decline. As of the end of the pit session, or 1:30, the spot price was $1,205.90 for a loss of $36.50 on the day. The Kitco Gold Index assigned -$54.80's worth of change to predominant selling and +$18.30's worth to greenback weakness.

The U.S. Dollar Index, after its own rout, managed to inch back to 84.9 in a recovery rally before sliding back once again. As of 1:35 PM, it was at 84.76.

In raw dollar terms, today's rout in gold has been the worst since February 4th's. Since a few floors collapsed today, gold could continue to tumble even though the electronic-trading hitch is usually calmer. The rest of the afternoon will show whether or not today's plummet comes to an end.


Update 2: As the later part of the afternoon showed, gold had a little drop left in it. After stabilizing around $1,207, the metal fell to slightly below the $1,200 level in mid-afternoon. Another attempted recovery turned into a deeper drop that saw the metal reach a new low of the day at $1,195.40. Another relief rally, this one slow, didn't pull it up above the $1,200 level but almost did. As of the close, the spot price was $1,199.40 for a loss of $43.00 on the day. The Kitco Gold Index attributed a huge -$65.70 to predominant selling and a very large +$22.70 to a weakening greenback.

The U.S. Dollar Index, after stabilizing earlier in the afternoon, showed that it had some more decline left in it too. From 84.9, a two-wave decline took the Index down to 84.42 by 3:50. After that bottom was reached, the dropping stopped and it managed to crawl up subsequent to a period of flat trading around 84.5. As of 5:30 PM, the Index was at 84.54.

Its daily chart, from Stockcharts.com, shows that the 85 floor previously holding was sliced through definitively:



I have to say that I expected more of a rise after June 21st's dip to 85.0, but the drop below it didn't surprise me all that much. Today's plummet means that a head-and-shoulders top, whose neckline was 85.0, is now complete. With that completion, the Index's bull run is over. I can't say it's gone into an all-out bear market, but I can say that it is in an intermediate-term decline. The Spanish government bond auction going fairly well early this morning, despite warnings of a downgrade by Moody's, proved to be the tipping point that put the Euro on the recovery track. That currency is now more than US$1.25.

Going back to the Index, its RSI level (found at the top of the chart) is lower than any level since the beginning of the Index's bull market in early December. Had the Index still been in a bull phase, the RSI value would have not gone as low as it has. It's now closer to oversold than neutral. Also for the first time since the bull run got rolling, the black signal line in the Index's MACD lines (found at the bottom of its chart) descended below zero.

All of this is not to say that the Index is going to keep falling precipitously, but it does say that bullishness on the greenback is a lot riskier now than previously. It would take another all-out flare-up of the Eurocrisis to change that risk level.

Gold's own decline, as shown in its own daily chart, was worse:



As indicated above, today's plummet rivals the one on February 4th for magnitude. There's one big difference between then and now: February's was the climax of a decline that started in early December; today's came on the heels of a range in which a new record high was made. Needless to say, that range was broken on the downside today.

There's another plummet to which today's can be compared, and it makes for a closer match conceptually: the one on December 4th 2009, two days after gold had made a 2009 record. That plummet prefaced an all-out correction, which may be what gold has in store for it now. If so, then its seasonality has finally caught up with it.

There are reasons for concluding the opposite, that gold just fell out of bed. First and foremost is the fact that a similar plummet took place in late May, which proved to foreshadow a buying opportunity that took place a couple of days later. Although late May's drop was less in magnitude, it did induce some panic that proved to be unfounded. If this one did, then it's a sign pointing to a wall of worry. I note that gold's long-term bull market is still intact.

If the metal follows the same script it's followed in plummets past, tomorrow will see a continuation of its decline but that continuation will largely reverse.

A post-pit Wall Street Journal report says that gold was abandoned while Treasuries were flocked to by the safety-haven seekers. Talk of deflation accentuated the letdown that came with the sucessful Spanish government bond auction. The disappointing U.S. economic data bred the talk of deflation.
"Investors are choosing Treasury's over gold," said Tom Pawlicki, precious-metals analyst with MF Global in Chicago.

The poor economic figures may be signaling a deflationary environment, Pawlicki said, causing participants to prefer Treasury's as a haven over gold, which is often viewed as a hedge against inflation in addition to its perceived role as a haven investment.

"Some of the risk money that went into gold is coming out today," said Ira Epstein, director of the Ira Epstein division of the Linn Group in Chicago.

The strong performance of gold recently made it vulnerable to a selloff to help participants make up for losses in other markets.

"A lot of...funds have been long gold," said Michael Gross, broker and futures analyst at OptionSellers.com in Tampa, Fla. "They're taking profit in those positions to pay for margin calls."
In other words, gold has been a victim of its own success as its gains made it like a tappable piggy bank. This factor added to the momentum selling.

Tomorrow's action could well see a continuation of the decline, in part because it's a pre-holiday day that's normally quiet. Few participants means exaggerated volatility if there's cause. That same factor did play a role today.

A decline from these levels wouldn't be that much of a surprise. What'll tell the tale is how gold reacts after any such decline. The accompanying sentiment will be telling too.

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