Thursday, July 29, 2010

Gold Slinks Up In Mid-Morning Trading

The rise was choppy after the daily bottom of $1,159.10 had been reached at 8:40 AM ET, but there was an underlying upwards tendency despite gold's choppiness; it ended at 11:00, but was evident for most of the morning pit session. Just before the peak, it was announced that the Italian government approved a 25 billion Euro austerity package which should protect its credit rating. Focused on public-sector pay freezes, pay cuts for high-earning civil servants and a crackdown on tax avoidance, it's expected to get the Italian government deficit to below 3% of GDP by 2012.

Gold's peak at 11:00 was at above $1,166; afterwards, the metal slumped back but bottomed at $1,162. As of 11:55 AM, the spot price was $1,163.00 for a loss of $0.30 on the day. The Kitco Gold Index attributed -$6.40 to predominant selling and +$6.10 to a weakening greenback.

The U.S. Dollar Index, after touching 81.5 as of 9:38 AM, underwent a rolling and hesitant rally that got it well above 81.7. As of 11:57, it was at 81.71.

So far, gold's held fairly steady. The storm has passed, but there's no real excitement in the market as of yet. Based upon today's signs, gold will likely continue churning in the afternoon.


Update: Instead of churning, gold climbed upwards in the last forty-five minutes of the pit session. The churning did continue a little after noon ET, but the metal didn't go back downwards after the last churn. Instead, it stayed between $1,163 and $1,164. Starting from the former level as of 12:45, the metal climbed above the latter level around 1:00 and continued upwards with only a little pullback. As of the end of the pit session, or 1:30 PM, the spot price was $1,168.50 for a gain of $5.20 on the day. The Kitco Gold Index assigned -$2.80's worth of change to predominant selling and +$8.00's worth to a weakening greenback.

The U.S. Dollar Index, after almost reaching 81.75, turned downwards and meandered down to a little below 81.55. The second leg of the downturn roughly coincided with gold's run. As of 1:35, the Index was at 81.57.

A little before the run, at around 12:30, St. Louis Federal Reserve president James Bullard said the best way to prevent a Japan-style deflation is for the Fed to buy more Treasury securities; merely holding the Fed Funds rate at near-zero might even be counterproductive. That support for more quantitative easing did have its influence on gold, and may have more later this afternoon.


Update 2: The run-up basically ended after the pit session did, with a double top at $1,169 right after 1:30 PM ET. From there, gold descended to a little below $1,166 before rebounding to around $1,168. From 2:40 to just before 5:15, the metal stayed within the confines of $1,167 and $1,168.50 only to drop below just before the close. At the end of regular trading, the spot price was $1,166.50 for a gain of $3.20 on the day. The Kitco Gold Index attributed -$4.30 to the predominant-selling category and +$7.50 to the weakening-greenback one. Both categories sum up to the raw change on the day.

The U.S. Dollar Index didn't move all that much over the rest of the session. Staying between 81.535 and 81.69, its overall direction was slightly upwards. As of 5:30 PM ET, it was at 81.62.

Its daily chart, from Stockcharts.com, shows a substantial decline from yesterday's mark-time level:



Yesterday, I thought a base was being built for the Index; today's drop makes me look premature, if not wrong. The main reason for the latest drop in the Index was the Euro making it above US$1.30; the chart shows a fairly clear sky for it with respect to the greenback.

The Index's RSI level is again back under the 30 oversold level. Ever since the plummet of July 5th, it hasn't been much above 40 and way below the 50 neutral level. Those levels are not characteristic of a bull market; they're more characteristic of a bear market. The last comparable RSI dry spell took place in May of 2009, as this 2-year chart shows:



If the Index follows the same track, it's got a long way to fall. However, the last RSI dearth was followed by a partial rebound and a month of stabilization. This one, should it occur, will bottom at a significantly higher level than the one in May of '09. From the long-term perspective the Index may be in a wide trading range between 89-90 and 74, or a huge gently ascending triangle. The U.S. Treasury is really caught between a rock and a hard place with respect to the U.S. dollar: a falling greenback makes for higher exports ceteris paribus, which would help spur the GDP numbers, but a rising greenback makes for currency profits enjoyed by foreign holders of U.S. Treasury securities; those gains make up for the low yield. I suggest gently that the institutional self-interest of the Treasury is more aligned with a rising greenback than with a falling one. I further suggest that the U.S.-as-Japan scenario is also in Treasury's interest because it implies the U.S. T-bond bull market will continue, thus lowering rates. Both developments prevent the more explosive U.S.-as-Greece scenario from erupting - and long-term debtors tend to develop a certain cunning. That debt inurement, plus the long-noted incentive on the part of the U.S. government to minimize reported inflation because doing so minimizes COLA-based entitlement spending increases, means the edge is tilted to gold when it comes to figuring out what's really going on with actual inflation. The bond market moves to the CPI, while the gold market tends to move with this series.

Speaking of gold, its own daily chart shows a continued recovery from Tuesday's plummet:



The technical picture for gold is still lousy, backing up the thesis that bargain-hunting is keeping it from declining further. The spills haven't been as sudden as the one in late-mid May, but yesterday's interday low was below that of May 21st's. The recovery over the two post-plummet days hasn't been as strong.

There's a chance for another one before the summer is through. If there isn't, then this summer's decline from peak to bottom will still be below average for the period. July is almost over, and August tends to see a pick-up. Ther may not be this summer, but the odds say it's likely.

A post-pit Reuters report said the gains were prompted by the above-mentioned Bullard speech, but large outflows from the SPDR Gold Shares Trust limited those gains. Amongst the points therein, these were included:
* Gold boosted on comments that the United States could fall into a Japan-style quagmire of falling prices and investment that is hard to get out of by St. Louis Fed president James Bullard.

* A sharp drop of bullion holdings in the world's biggest gold-backed exchange traded fund combined with a loss of COMEX open interest indicated investors are moving out of the precious metal into other assets such as the equity markets.

* Trading volume of U.S. COMEX gold futures also rose to an all-time high on Wednesday, driven by a combination of an option expiration and contract rollover.

July is almost over, and gold's performance in August is the big question mark. If the metal continues to follow seasonal patterns, there will be a pick-up next month. If a pick-up doesn't come by Labour Day, then the talk about a new financial crisis may have substance to it.

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