Friday, July 16, 2010

Gold Plummets On Bad News, Euro Lift

The recently-established negative correlation between gold and the greenback broke down early this morning, to gold's detriment: the rising Euro had prompted selling of gold from largely European safe-haven buyers. That breakdown encouraged a real sell-off when regular trading opened, which was accentuated by news that the June U.S. CPI fell 0.1%. Although the core rate rose at a higher-than-expected 0.2%, the drop in the raw rate was unexpected. Gold had already started plummeting before the data were released, but the numbers added to the plunge. From $1,204 before the pit session opened, gold was left at $1,190 a little after 8:45 AM ET.

From there, it recovered a little but continued sliding more slowly later. A big tumble in the U.S. consumer sentiment number for July hit the market as it was in a brief relief rally. Shortly after, the metal dropped to its day's low of $1,185.20.

Then, a real relief rally set in. Gold managed to climb up to $1,193 before the climb rounded into another fall. As of 11:53 AM ET, the spot price was $1,190.00 for a loss of $18.40 on the day. The Kitco Gold Index split the loss into -$15.70 for predominant selling and -$2.70 for weakening in the greenback.

The U.S. Dollar Index climbed in the same timeframe, perhaps influenced to do so by the plummet in gold. From below 82.1 as of 8:21, the metal rallied inconsistently but steadily. As of 11:55, it had gotten up to 82.58.

Although this morning was a bad one for the metal, the plummet halted around the bottom of its current interday range. It should be cushioned by bargain hunting once things calm down.


Update: The downward part of the rolling top came to a halt at a little below $1,190. Since then, gold hasn't moved much but hasn't gotten above that level. No further tumble has taken place, but the wind has been knocked out of the metal. As of the end of the pit session, or 1:30, the spot price was $1,188.20 for a loss of $20.20 on the day. The Kitco Gold Index divided the loss into -$16.90 for predominant selling and -$3.30 for greenback strength.

The U.S. Dollar Index hardly moved in early afternoon. Any movement there was showed a tiny upward bias. As of 1:30, the Index was at 82.59.

The electronic-trading hitch for the rest of the afternoon is likely to be quiet. A substantial loss is all-but guaranteed for today, as well as this week, but it could have been worse.


Update 2: The relief-rally effect continued in the electronic-trading hitch; gold managed to climb back above $1,190 shortly after the pit session ended. The subsequent rally was hesitant and slow, but it had enough push to move the metal up to $1,193.00 at the close. The change on the day was -$15.40; the Kitco Gold Index apportioned that change into -$12.60 for the predominant-selling category and -$2.80 for the strengthening-greenback one.

Had it not been for today, this week would have seen a slight loss. Given how today went, it ended with a drop that was substantial: from last week's close of $1,211.40, the decline was $18.40 or 1.52%. There have been worse weeks, but this one was pretty bad.

The U.S. Dollar Index hardly moved, but any movement was basically upwards by mid-afternoon. As of the end of the week, it was at 82.55.

Its daily chart, from Stockcharts.com, shows a new interday low but a slight turnaround by the close:



Today's low brought the Index to a level not seen since May 4th, at about the time the Eurocrisis erupted. Virtually all of the gains since the beginning of May are gone. The Index's RSI level is still below 30, putting it in oversold territory.

There was the hint of a bounceback today, but the peak was reached in late morning. So far, the Index's oversoldness has not prompted any significant relief rally at the interday level. As time goes by, given the mechanics of the RSI's calculation, the number should move up if the Index stays steady. That might be its fate in the near future.

Turning to gold, its own daily chart shows the damage done after regular trading opened:



As indicated in the earlier parts of this post, the metal's interday low was made in mid-morning. Today's candlestick, unlike those of the previous two days, is at the lower end of the $1,185-$1,219 interday range. Today's interday low was a little higher than last week's lowest, keeping the range intact.

Interestingly, gold is about where it was at the beginning of May too. April's upward move was strong enough to get the metal up above $1,180 for May 3rd's daily high. There may be a further test of the low next Monday, but there's a fair bit of bargain hunting that will kick in now that the price is below $1,200.

Last Tuesday saw a rally that pushed gold up to near $1,215 by the end, and to about $1,218 at the day's high. That day's close is the cut-off point for this week's Commitment of Traders data, graphed here. Total open interest shrank a bit, and so did all of the reportable categories. Interestingly, the one that shrunk the most in percentage terms was non-commercial shorts: it shrunk by 7.78%. Given gold's strength that day and resilience during the next two, that shrinkage was understandable but it still came near the week's peak. Evidently, there were a few speculative shorters who threw in their hands several days prior to a worthwhile day for such an endeavour.

The U.S. Dollar Index's CoT data, graphed here, had as its cut-off a day when the previous days' rise had turned into a decline; the next day saw a fair drop prior to yesterday's big one. As of the Tuesday-close cut-off, total open interest shrank yet again. There were only two weekly periods this entire 52-week period with lower open interest than this week's. Commercial longs shrunk again; the category is about a tenth of what it was as of the beginning of last fall. All of the reportable categories shrunk except for non-commercial shorts: it increased, but only barely. Again, this category was the place to be for a speculator.

Turning back to gold, a post-pit Reuters report ascribes today's tumble to fund selling. Amongst the points made therein, these were included:
* Gold pressured by heavy fund selling near COMEX session open - James Steel at HSBC.

* Heavy selling of gold call options by a fund manager in early trade hurts sentiment - COMEX floor trader Jonathan Jossen.

* A report showing weak energy costs pushing U.S. consumer prices lower for a third straight month decreases use of the precious metal as an inflation hedge.

Heav selling there was, but gold has not been pushed into a new bearish channel because of it. Monday won't likely be exciting, but buying pressure all-but-surely will come in.

Thanks for reading what I've got to write. May your weekend not be afflicted by blackouts or brownouts.

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