Monday, July 12, 2010

Gold Sinks Below $1,200

It wasn't much of a drop below that round number, but gold did get below $1,200 due to a drop between 10:40 and 10:55. In the first hour, the metal was trending up somewhat; it peaked above $1,208 around 9:45. Sliding back down to the $1,204 level, gold stayed where it was while Ben Bernanke made a speech about the dry-up in business credit. Some time after its completion, gold dropped to $1,198. After a downward test of that floor, the metal rose slightly above but failed to break through $1,200. As of 11:47, the spot price was $1,199.70 for a loss of $11.70 on the day. The Kitco Gold Index split the loss into -$6.45 for predominant selling and -$5.25 for strengthening of the greenback.

The U.S. Dollar Index managed to recover some ground in morning trading, but breaking through 84.4 eluded it. It spent the morning marking time in a range between that level and 84.2. As of 11:54, the Index was in the upper part at 84.32.

The mid-morning drop was not that extensive, but it was unexpected. There is a chance of a further decline to well below $1,200 in the afternoon.


Update: There wasn't any further decline, but there also wasn't any real advance. Instead, gold stayed stuck where it was. An attempted rally around noon ET got it above $1,200, but only briefly and not by much. The ceiling of about $1,201 was followed by a dip to $1,198; those two values established a range that gold stayed within as the pit session wound to an end. As of 1:30, the spot price was $1,198.70 for a drop of $13.00 on the day. The Kitco Gold Index divided the loss into -$9.80 for predominant selling and -$3.20 for greenback strength.

The U.S. Dollar Index, after making it to almost 84.4 just before noon, fell fairly steadily in early-afternoon trading. A temporary halt around 84.25 was followed by a further drop to 84.2, which also gave way to a halt. As of 1:35, it was at 84.19.

The other shoe didn't drop in early afternoon, so gold might as well be stuck at $1,200. The electronic-trading hitch shouldn't see the metal drop all that much further.


Update 2: After slowly veering in on $1,198, the metal did drop a little - but not after making a molehill of a rise that took it up to $1,201. Subsequent to that rolling hillock, the price dropped down to its closing value of $1,197.10 for a loss of $14.30 on the day. The Kitco Gold Index apportioned the loss in this way: -$10.70 to the predominant-selling category and -$3.60 to the strengthening-greenback category.

After falling back from its noontime rise, the U.S. Dollar Index quieted down. Drifting between 84.18 and 84.27, it managed to stay well above 84. As of 5:30 PM, it was at 84.235.

Its daily chart, from Stockcharts.com, shows a rolling bottom still forming:



I did mention last Friday that there was no guarantee that the Index would continue recovering from what was an iffier bottom as of then, but today's action makes the short-term bottom less iffy. Since there's no real driver back, the most likely cause is its previous oversoldedness. Thus, I repeat there's no guarantee that the greenback will enjoy a sustained rally; the winds are no longer in its favour.

As for gold, its own daily chart shows a short-term trading range:



My hope that Friday's impressive performance would lead to a more sustained rally was disappointed today, but gold never got much below $1,200. Today's close was a little below yesterday's open, which is consistent with a trading range. The metal's interday low today is still well above last week's low.

There's not much sign of gold going higher as of now. Its RSI level, shown at the top of its chart, has been in the sub-50 doldrums for an unusually long time with respect to last three month's trading. It's not been consistent with a bull run; it is consistent with being stuck. Still, gold is less than seventy dollars off its high: hardly a correction, and much better than the slide from early December to early February. The most likely explanantion for the doldrums is seasonal weakness in the absence of any drivers like the Eurocrisis.

A post-pit Reuters report ascribed the drop to profit-taking. Amongst the point made therein, these were included:
* Gold fell amid short-term profit-taking selling off of Friday's run to the top of its recent range - traders.

* Gold's range has been forming since the start of July, with the support being defined as the 6-1/2 week low at $1,185 an ounce hit on July 7, and the top around the July 6 high at $1,215 an once - traders.

* For now, analysts and traders said they regard $1,200 an ounce as the psychological point around which gold continues to fluctuate until clearer directional signals emerge.

* A break above resistance would send gold back to its all-time high at $1,266.50 on the August Comex gold contract reached on June 21 - Adam Sarhan, chief executive of New York-based Sarhan Capital Llc.

* A violation of support could lead to $1,134 - Sarhan.

* Longer term, gold's prospects remain bullish - analysts.
Also mentioned was the strength of the greenback helping to push gold down.

As I said above, gold's seasonal weakness is back. Still, given last month's record high, "sell in May and go away" would not have worked. Gold's action is still consistent with $1,200 being a bargain point, which should temper or even muffle any futher decline. A short-term range has been established.

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