Tuesday, July 27, 2010

Gold Tumbles To $1,160

After a combination of good and bad U.S. economic news, gold tumbled well below the floor of its current range. The decline started slowly around 8:40 AM ET; by the time the Case-Shiller Housing Index number was released, showing a 1.3% seasonally-unadjusted increase in home prices in the twenty cities surveyed, gold was at $1,182. The tumble began at the same time the data were released, or 9 AM. An hour later, the metal was at $1,170. Then, the Conference Board's consumer-confidence numbers were released. The overall index value was 50.4, a big drop from last month's revised 54.3.

The metal's fall continued after this item was disseminated. A fifteen-minute relief rally between 10:15 and 10:30 failed to get the price above $1,170, and the metal ended its tumble at a new daily low of $1,159.70. Since that low, made at about 10:45, gold was drifting around the $1,162 level before blipping down a bit. As of 11:53 AM, the spot price was $1,160.70 for a loss of $21.40 on the day. The Kitco Gold Index split the loss into -$18.30 for predominant selling and -$3.10 for a strengthening greenback.

Exacerbating gold's losses was an upturn in the U.S. Dollar Index to well above 82. Although the extent of the rally wasn't large - it got no higher than 82.375 - the direction was clear. From around 81.9 at the time gold's tumble began, the Index climbed intermittently but steadily in morning trading until it hit that peak at 11:21. As of 11:56, it was at 82.24.

I admit to beign surprised by the tumble, which has taken gold down a fair bit today. It's possible that physical buying will be deterred by hopes of a further drop. Still, solid support exists at $1,160 which is still holding up.

Update: That support level gave way just before 1:00 PM ET, after a dip below it just after noon. Shortly after 1:00, the metal made a new daily low of $1,156.80. That foundering was enough to keep it from reaching $1,160 by the end of the pit session. As of that time, or 1:30, the spot price was $1,158.40 for a drop of $23.70 on the day. The Kitco Gold Index divided the loss into -$19.75 for predominant selling and -$3.95 for strength in the greenback.

The U.S. Dollar Index, after hovering around 82.25, fell to 82.1 between 12:10 and 12:20. The Index subsequently recovered, and managed to surmount 82.25 just before 1:30. As of that time, it reached 82.31.

Gold's tumble did lead to an aftershock, which the $1,160 level failed to halt. There may be further drops later this afternoon, but they're likely to be limited in extent.

Update 2: As it turned out, the $1,160 support level was restored in later-afternoon trading. The rebound took place shortly after the end of the pit session. After which, the metal hovered around $1,160; except for a mid-afternoon stretch, it slowly inched up. As of the end of regular trading, the spot price was $1,161.60 for a drop of $20.50. The Kitco Gold Index apportioned -$18.70 to the predominant-selling category and -$1.80 to the strengtening-greenback one.

The U.S. Dollar Index pulled back a little in later afternoon but stayed well above 82. Sliding down to 82.1 by 4:20 PM ET, the Index then pulled up and settled around 82.15. As of 5:30, the Index was at 82.145.

Its daily chart, from Stockcharts.com, shows a slight recovery overall:

Despite that recovery, the fall continues. 82 did hold at the end of the day, but it was unsuccessfully challenged. Today's interday low made for a new one not seen since May 4th. The Index's RSI level (found at the bottom of its chart) continues to droop at near-oversold levels, suggesting the momentum in late spring is long gone.

However, there's a slight divergence. Today's RSI level is a little bit higher than the one at the last near-term high, while today's Index low is lower. The MACD lines, found at the bottom of the chart, are still in a bearish configuration but are close to crossing over into a bullish one. Given the Index's performance since early June, such a crossover isn't likely to portend much more than a more extended upward reaction. Still, the courrent drop can't go on forever.

As for gold, its plummet today shows quite prominently on its own daily chart:

The old $1,175 support level gave way, even though $1,160 ended up holding. Gold's own RSI level is fairly close to oversold levels, and its own MACD lines are still solidly in a bearish configuration.

There's a chance for a further fall if this day's tumble resembles late May's. The physical buyers waiting for the chance to buy below $1,175 will have their chance, but they may pull their bids in the hope of more declines. So far, I've seen no missives pegging the current rout as a buying opportunity.

If the behaviour after this plummet is like that after the last one, the metal will muddle along just above $1,160 with a ceiling around $1,175-$1,180. Whatever the outcome, the seasonal summer weakness is still afflicting gold.

A post-pit Reuters report pegs the decline as caused by technical selling triggered by the above-mentioned housing and consumer-confidence data plus options expiry. Amongst other points therein, these were included:
* After trading modestly weaker in early sessions, bullion prices accelerated losses despite firm U.S. stock markets and a flat dollar.

* Gold pressured as crude oil leads commodities to decline on weak consumer sentiment.

* Selling related to COMEX August option expiration and first-notice day on Friday trigger heavy selling in gold futures - Sean Lusk at futures broker PFGBest.

* Bullion prices are at risk of breaking below a two-year bullish support channel and could fall toward $1,000 an ounce, CitiFX said.
That could happen if the physical-buying rug is pulled out and stays furled, but it seems unlikely. Today was a bad day for gold, one I didn't expect, but it's not the first time such plummets have visited the market. The long-term bull market is still intact.

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