Gold Sinks Below $1,180 In Morning, Crawls Above In Afternoon

From above $1,188 at 8:30 AM ET, the metal sunk well below $1,180 as trading demand diminished. The bulk of the drop took place over the next hour; a little after 9:30, gold was below $1,179. A slight recovery to between $1,180 and $1,182 gave way at 10:40, taking the metal down to a new daily low of $1,176.70. The home builders' index, released at 10:00, shows a level of pessimism not seen since April of 2009. Although not having a direct influence on gold's turn-down, it played in to the recent worries about deflation. As of 11:57 AM, the spot price was exactly $1,180.00 for a loss of $13.00 on the day. The Kitco Gold Index attributed -$13.50 to predominant buying and +$0.50 to a weakening greenback.

The U.S. Dollar Index, after getting up to 82.64 right around the time gold started its slide, weakened to below 82.4 until 10:07. Recovering most of its lost ground, it got to just below 82.55 before pulling back a little and then fluctuating before resuming its climb. As of 11:52, it was at 82.52.

Mood has shifted to watching for deflationary tendencies as the U.S. economy shows post-stimulus weakness. This mood shift continues to drag down gold, although the declines are not that swift. The metal managed to get back above $1,180, and may stay there in the afternoon.


Update: The metal did slip back to $1,178, but that slip-back didn't last long. Touching that level at 12:15 PM ET, it bottomed higher than the daily low. The post-noon dip made for a double bottom, which preceded another run-up to the $1,180-$1,182 area. As of the end of the pit session, the spot price had reached the upper edge of the zone; as of that same 1:30, it was $1,182.10 for a drop of $10.90 on the day. The Kitco Gold Index split the loss into -$10.70 for predominant selling and -$0.20 for a strengthening greenback.

The U.S. Dollar Index managed to get above 82.55 in early afternoon trading, after being stuck between there and 85.5 for about an hour. Almost bettering a 12:05 spike, it climbed to 82.585 before settling down slightly. As of 1:35, it was at 82.56.

Although the overall mood is still gloomy, the metal did manage to pull up above $1,180. Bargain hunting isn't very evident right now, but physical markets are showing a definite revitalization. The spot market still has a certain resilience that does hinder, if not stop, any declines.


Update 2: That revitalization continued, although at a slow pace. After bumping against the $1,182 level until 2:25 PM ET, the metal climbed sustainably above it and managed to reach almost $1,185. After that crawl, interrupted by a revisit to $1,182, the metal pulled back again to that same level before blipping up near the end of the day. As of the close, the spot price was $1,184.10 for a drop of $8.90. The Kitco Gold Index divided the loss into -$8.40 due to predominant selling and -$0.50 due to a strengthening greenback.

The U.S. Dollar Index drifted upwards as well, in a wavy motion that contained a couple of pullbacks. As of 5:30, it was at 82.61.

Its daily chart, from Stockcharts.com, shows a bit of a recovery from its depressed levels:



That pull-up was little more than a bounce, and can be explained by the Index being oversold. Its RSI value, found at the top of its chart, is still below the 30 oversold level albeit slightly. That's not to say the Index looks good from a technical standpoint. Its MACD lines are still in a definite bearish configuration, and have been so for more than a month. In terms of overall value, they've only been lower than today's levels during three periods in the last three years: the nadir of the greenback bear market ending in early '08, the post-'08-crisis plummet in March of '09, and the climax of an intermediate low in June of '09. This three-year chart shows it, as well as some fairly dim prospects for the Index:



Turning to gold, its own daily chart shows the damage done by this morning's drop:



Gold did break through its short-term range on the downside today, as the chart shows. However, that breakdown may not be as serious as it looks. There's still physical buying at sub-$1,200 levels, and there may be a lot of it at these prices particularly in India. The chief risk in the breakdown is further technical selling, as more short-term oriented buyers give up. That eventuality would also encourage physical buyers to pull their buy prices down, as price acclimatization works both ways.

Still, that demand is there and will eventually cushion the market even if there's a waterfall decline. Summer weakness has been pushed back because of the Eurocrisis, but has reasserted itself now that the crisis has gone dormant. There's less to the chart than meets the eye.

A post-pit Reuters report said technical selling and a weak housing report pushed down gold. Amongst the points therein, these were included:

* Weak U.S. July homebuilder confidence hit a 15-month low, hurting bullion's appeal as an inflation hedge - traders.

* COMEX August broke below a major up-trend line dated back from a February low after suffering a price breakdown on Friday - Rick Bensignor, chief market strategist at Execution Noble.

* However, the bullish pattern remained intact based on continuous one-month futures and spot gold despite August's weakness - Bensignor.

Desite today's disappointment, gold's weakness is still a combination of post-Euroflareup hangover and seasonal weakness. The metal may continue to decline tomorrow, but this afternoon's action suggests it won't - or, at least, it won't by all that much.