Thursday, August 5, 2010

After Touching $1,200, Gold Slumps Back

Gold managed to touch $1,200 in the beginning of regular trading on the heels of a disappointing jobless-claims report, but its momentum faded at 8:50 AM ET. From then until just after 11:00, the metal rolled downwards to a new daily low of $1,189.20. A relief rally took it to $1,194 shortly afterwards, but the momentum of the last six days has been broken. As of 11:55 AM, the spot price was $1,194.20 for a loss of $1.40 on the day. The Kitco Gold Index attributed -$1.70 to predominant selling and +$0.30 to overall weakening in the greenback.

The U.S. Dollar Index, after being knocked down by the jobless-claims report, recovered in mid-morning. At the same time gold reached its low, the Index almost touched 81.0. Since 11:07, it's been hovering just below that level. As of 11:57, it was at 80.91.

The newly-restored inverse correlation between gold and the greenback has asserted itself to the detriment of the metal. There may be somewhat of a pickup in the afternoon, but it looks like gold's recent momentum will stay drained.

Update: The momentum did come back, enough to put gold into the gains column. The recovery rally that began a little after 11 AM ET continued through 12:45, when the metal managed to get a little above $1,197. $1,200 eluded it, though. After that peak, it sunk down to around $1,195 and hovered between there and $1,196 before pulling up. At the end of the pit session, or 1:30 PM, the spot price stood at $1,197.30 for a gain of $1.70 on the day. The Kitco Gold Index split the gain into +$0.35 for predominant buying and +$1.35 for greenback weakness.

The U.S. Dollar Index continued to hold below 81.0, and lost a little ground in early afternoon. It managed to stay above 80.85, but bumped against that lower level. As of 1:30, the Index was at 80.86.

As for gold, its recovery from its morning drop shows an overall stall between $1,200 and $1,190. $1,200 was not tested again after that post-jobs-claims rally. Although held back, the metal is still showing some price resilience. There's a good chance of a slight gain at the close.

Update 2: That chance wasn't met, even though the end-of-pit rally got gold up to $1,198 by 1:50 PM ET. For the rest of the afternoon, the metal slowly trended downwards or sideways with nary a relief rally. At the end of regular trading, the spot price was $1,194.90 for a slight loss of $0.70 on the day. The Kitco Gold Index assigned -$3.70's worth of change to the predominant-selling category and +$3.00's worth to the weakening-greenback one. Both categories sum up to the raw change on the day.

The U.S. Dollar Index ended up falling below 80.85, which helped catalyze gold's final rally in regular trading. The Index then trended downwards, but not by much; it ended up fluctuating around 80.75. During that time, gold followed its own path downwards. As of 5:30 PM, the Index was at 80.77.

Its daily chart, from, shows its holding pattern continuing:

Today's interday high was slightly higher than yesterday's, which itself was higher than that of two days ago. The daily lows of all three days were about the same. Still, the Index was down from opening to closing.

Its 200-day moving average, as shown by the red line in the lower middle of its chart, has continued to provide support. The Index's RSI level, found at the top, is still in oversold territory. There hasn't been any real springback as yet, but the Index may be preparing for a secondary run-up.

As for gold, its own daily chart shows its rally stalled:

This morning's test of $1,200 is evident from the chart, but so is the lower interday high as compared with yesterday's. The $1,200 barrier has proven to be fairly potent, especially since there's been no real sustained driver for gold except bargain hunting that melts away when the price approaches that barrier.

Perhaps there won't be any sustained rise unless there are signs of inflation in the developed economies kicking in. More immediately, the Fed undertaking a second quantitative-easing program would provide the necessary kicker. Gold may well stay stuck in the 1,190s for the nonce, and there's the possibility of it falling to the 1180s. In the latter zone, bargain hunting will come back.

A post-pit Reuters report, which preceded the electronic-trading-hitch slump, said gold rose for the seventh day in a row because of a weaker greenback and a leap in grain prices. Amongst the points therein, these were included:
* Weakening of the dollar beginning to work in favor of gold recently - James Steel at HSBC.

* Rising wheat prices after Russia said it would temporarily halt grain exports due to the country's worst drought on record sparked inflation worries - Steel said.

* On charts, a buy signal was triggered earlier this week when the MACD moved above the signal lines, according to the moving average convergence/divergence (MACD) analysis.
That crossover took place yesterday, and evidently made an impression.

In and of itself, the bump-up in wheat prices is a temporary spike but it may catalyze a big run in the commodity. Gold's reaction to it suggests players are on the lookout for inflation, putting the doubt to the recent deflation talk. The metal may be due for a rest tomorrow, but it's still in a fairly good position technically. A drop below $1,190 is unlikely.


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