Thursday, July 22, 2010

Gold Takes Off, Is Stopped At $1,200

Despite the unexciting beginning of regular trading, which didn't anticipate gold's jump starting at 9:30 AM ET, the metal went on a tear between then and 10:00. The catalyst for the rise was a continuation of the greenback's woes.

From a dawdle around $1,186, the metal leapt up all the way to $1,202.20 before the advance halted. At the same time, the June leading economic indicators were released; the overall tally came in at a 0.2% decline, indicating slower growth. The previous month was bumped up to a 0.5% gain. Existing home sales came in with a 5.1% drop, which was better than expectations.

After the stall around $1,200, gold slowly pulled back but stayed above $1,195. As of 11:45, the spot price was $1,195.80 for a gain of $9.70 on the day. The Kitco Gold Index attributed -$0.80 to predominant selling and +$10.50 to a weakening greenback.

The U.S. Dollar Index went on a decline starting at 9:34, which was temporarily interrupted around 10:00 when the above data were released. From 82.83, the Index got below 82.5 after a climactic tumble. A more durable relief rally fizzled, and the Index entered into an interday range. As of 11:53, it was at 82.56.

Again, gold was given a lift-up by the greenback's woes. It's not like clockwork, but the negative correlation between the two is reappearing. Gold still can't get and stay above $1,200, but it's bumping up against that level once again.


Update: $1,195 held, but the metal didn't get much above that floor. Early afternoon saw it in a range centered at $1,196 with little action except fluctuations. As of the end of the pit session, or 1:30 PM ET, the spot price was $1,196.20 for a gain of $10.10 on the day. The Kitco Gold Index assigned -$0.20's worth of change to predominant buying and +$10.30's worth to greenback weakness.

The U.S. Dollar Index also changed little in the same timeframe. Stuck largely between 82.55 and 82.6, a very slight upward bias was replaced by a very slight downwards bias. As of 1:35 PM, it was at 82.55.

Gold right now is a lot like twenty-four hours ago, only this time without any event like the Fed testimony to drive it down (or up.) The metal's in position to book a solid gain on the day, and could swing more than ten dollars up.


Update 2: It didn't, but it was close. Gold fluctuated even less in the electronic-trading hitch. After an attempted jump that got up to $1,198 by 2:30 PM ET, the metal sunk back to $1,196. Then, a very gentle drift-down took pace that quietly pushed the metal below $1,195. As of the close of regular trading, the spot price was $1,194.50 for a gain of $8.40 on the day. The Kitco Gold Index attributed -$1.60 to the predomiant-selling category and +$10.00 to the weakening-greenback one. Both categories sum up to the raw change on the day.

The U.S. Dollar Index continued to drift along. That slight downward bias ended at 2:10, when the Index touched 82.5. Then, a jump to 82.65 took pace that ended as of 2:40. The rest of the day was spent fluctuating between 82.55 and the aforementioned 82.65. As of 5:30, it was at 82.63.

Its daily chart, from Stockcharts.com, shows yesterday's gain being reversed today:



Of course, that reversal is what gave gold its impetus to rise today. Despite that drop, the Index is still well above the near-term technical support level of 82. It wasn't that long ago when a break above 82, and a pullback to a little below it, was the prelude for a real rise. That's where the Index was less than three months ago.

There is the possibility that 82 will prove to be a durable support level, in which case the Index will likely churn. If not, then another decline is likely.

As for gold, its own daily chart shows today's gain exceeding yesterday's loss:



Last Monday's decline has given way to another holding pattern, with the short-term low being made on Tuesday. Although there's little sign of a real rally, the metal is still holding up fairly well with physical demand providing the floor. There hasn't been that much lately from the usual sources, but that's because the price has risen some. The metal is likely to continue its holding pattern, with any matching of Tuesday's interday low being bound to meet a lot of bargain hunting.

A post-pit Reuters report ascribed the rise to a brighter economic outlook for the U.S. Amongst the points made therein, these were included:

* Strong corporate revenue growth by bellwether U.S. companies fueled a cross-asset rally, lifting equities, gold and other commodities.

* The metal, viewed as a safe haven during times of economic uncertainty, had seen limited gains ahead of outcome of European banks' stress test due Friday.

* Gold has been largely moving in tandem with the equity markets since early June, as the euro rallied on dissipating fears about European debt contagion.


It seems inconsistent to ascribe today's rally to renewed hopes for the U.S. economy, but gold's been recently retreating on fears that a slowdown would lead to deflationary tendencies, which would knock down the metal. Given this backdrop, gold rallying along with stocks makes sense.

The stress tests are due to be released tomorrow, and gold may get a kick upwards if they go badly. Absent that, the metal is likely to continue hovering below $1,200. The summer doldrums continue.

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