Tuesday, July 6, 2010

Taking Two Drops, Gold Sinks To $1,190 In Morning; Stays In Low 1190s

Gold's first drop started before the pit session began, around 8:00 AM ET. It sunk to a little below $1,200 by just after 8:30 and hovered above that level until about 9:35. Its second tumble was quicker and deeper. Starting right after the U.S. equity markets opened up strongly, the metal suffered by unwinding of safe-haven trades. By a little after 9:45, the metal was below $1,190.

The much-anticipated ISM Services Sector report showed expansion, but less than what was expected. The release of the number had little effect in gold either way; it remained stuck between a little below $1,190 and $1,194 before crawling above just before noon. As of 11:57 AM ET, the spot price of the metal was at $1,196.60 for a decline of $12.30 on the day. The Kitco Gold Index attributed -$21.50 to predominant selling and +$9.20 to weakening of the greenback.

The U.S. Dollar Index, after showing a bit of strength earlier in the morning, did get affected by the ISM report. Starting at 10:00, it stumbled from around 84.25 to well below 84. Although most of the tumble was immediately after the report's release, the Index still headed down in a more leisurely drop which bottomed about an hour later at 83.85. A final blip downwards prefaced a trading range centered at around 83.9. As of 12:00, it was at 83.91.

Good times for equity markets have taken their toll on the metal, which did thrive on earlier equity declines. The U.S. equity markets keep fording higher, but gold's decline potential has been exhausted for now. The afternoon part of the session may continue the calm.

Update: The rise that began at 11:45 AM ET petered out a little after noon, and the metal slowly sunk back down to below $1,193. A little before the pit session ended, another upturn began. The bottom as of 1:15 PM was higher than the bottoms formed in the morning. The second top was about the same height as the first. Another pullback kicked in just before the end of pit trading. As of that end, or 1:30 PM, the spot price was $1,195.00 even for a loss of $13.90 on the day. The Kitco Gold Index assigned -$22.70's worth of change to predominant selling and +$8.80's worth to weakness in the greenback.

The U.S. Dollar Index drifted in early afternoon; it didn't sink back below 83.9 but also didn't get back above 84. As of 1:30 PM, it was at 83.93.

There hasn't been much of a relief rally for gold, but the quiet suggests there will be no further tumbles today. $1,200 doesn't look very reachable, but there's a chance the metal will regain that level.

Update 2: That last uptick didn't do much for gold; shortly after the end of the pit session, it drifted back down to the $1,192 level. Falling below just after 3:00 PM ET, the metal briefly dropped to $1,188.40 before recovering to $1,192-$1,194. A last-minute jump got the metal slightly above that range: as of the close the spot price was $1,194.10 for a loss of $14.80 on the day. The Kitco Gold Index attributed -$22.00 to the predominant-buying category and +$7.20 to the weakening-greenback one. The two changes sum up to the raw change on the day.

The U.S. Dollar Index drifted up from its lassitude starting in early afternoon. At the peak, the drift-up got the Index up above 84 to 84.12. Stalled at that level around 3:30, it drifted down to near the 84.05 level. As of 5:30 PM, it was at 84.03.

Its daily chart, from Stockcharts.com, shows it testing the 84 level that held at the end of the day:

The technical picture for the Index continues to deteriorate as the Eurocrisis keeps staying on hold. Its RSI level, found at the top of its chart, is closer to oversold (30) than to neutral (50). It's on track to the RSI touching oversold outright, which has never occurred since the bull market began last December; the last time it dropped below 30 was in last September, when the bear market had yet to run its course. Both MACD lines, found at the bottom of its chart, are below zero for the first time since mid-December. They're still in a bearish configuration, with the red line over the black line.

Given the overall deterioration, it's hard to see the Index rallying more strongly than bounceback should it become oversold. The bull phase lasted six months, from the beginning of December to the beginning of June. The current pullback has been in place for almost a month, and seems to have some ways to go. Believe it or not, a continued fall to as low as 82 would not signal an end to the overall bull market. That's because the last month of the bull run saw a very rapid advance.

As for gold, its own performance today doesn't make for much optimism either:

The $1,200 support level that held yesterday yielded today. Gold's own RSI level is between neutral and oversold, and its MACD lines are in a solidly bearish configuration. Recently, gold and the Index have been moving in tandem again because the safe-haven demand for both continues to melt away.

I can't say how low it will go, but this decline is being accompanied by skepticism and gloom; there wasn't any bullish frenzy accompanying its recent nudge towards a new record high. The last time gold plummeted and kept drifting down, in late May, it ended up recovering.

A post-pit Reuters report says gold was pressured due to a combination of technical factors and rising risk appetite (i.e., demand for equities.) Anongst the points therein, these were included:
* Selling momentum picked up with break below last week's trough at $1,196. Market's inability to break further attracted some late short-covering - traders.

* Market coming to an end of unwinding of the gold/euro spread. Price correction seen healthy - Frank McGhee, head precious metals trader with Integrated Brokerage Services LLC in Chicago.

* Improved risk sentiment on back of upbeat assessment of global economy by Reserve Bank of Australia....

* Indian buying continued as traders in world's biggest gold consumer picked up bargains ahead of a second round of festivals and watched rupee for direction.

The above-mentioned selling momentum may continue tomorrow, but expectations are inclined towards this current downtrend being a pullback like late May's. Given increases in demand for physical, any further downtrend should be cushioned unless a negative driver rears its head.


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