Friday, February 12, 2010

Gold Recovers After China- And Stock-Market-Related Drop

There was another morning slamdown in the gold price, but not at the usual time. Instead, it was prompted by a U.S. Dollar Index rally that accompanied a disappointing opening for U.S. stocks. That rally melted away with remarkable speed starting at 9:41 AM ET: in fifteen minutes, the Index went from a new high of 80.6692 to a low of 80.3161. A partial recovery prefaced a further downturn, to below 80.25, after which the Index started climbing and retrenching. As of 11:45 AM, it was at 80.35.

Right around the time of the dollar's run, gold lost about ten dollars an ounce before stopping just below $1,077. Subsequently, it was see-sawing in a relatively wide range bounded by $1,076 and $1,087. The top of the range was at the early-morning low that had prevailed before news of the impending People's Bank of China reserve-requirement boost was disseminated.

The Kitco Gold Index indicates the picture is better than it looks. As of 11:46 AM ET, gold was at $1,088.60 for a drop of $4.00 on the day. $4.60 was explained by strength in the U.S. dollar, leaving a gain of 60 cents due to predominant buying. Compared to the January 12th rout, which resulted from the last reserve-ratio hike, the gold market took the news relatively well. Of course, gold's more than $70 lower this time; it's closer to prices that many physical buyers feel are bargains right now. The lower price this time 'round led to a much lesser air pocket.

In fact, there's a real chance that the "air pocket" may be filled with rubber. The afternoon will tell if last night's levels are recovered. The way trading's going, a renewed sell-off looks unlikely.

Update: The gold rally did continue higher as the U.S. Dollar Index continued to fall. As of 12:25 the Index was at the same level it was as of 10:18. Gold, however, was more than four dollars an ounce higher.

That rally, which began at 9:40 AM ET, kept going until 12:20; the metal reached more than $1,091 then. Since that time, gold tailed off to the higher $1,080s as the greenback rebounded. As of 1:32 PM ET, spot gold was at $1,087.40 for a drop of $5.20 on the day. The Kitco Gold Index says that almost all of that drop, all except $0.20, was due to U.S. dollar strength.

As for the U.S. Dollar Index, it rose in a two-step pattern from 80.24 to 80.4 from 12:15 to 1:20; since then, it pulled back a little and then wavered. As of 1:33 PM ET, it was at 80.38.

So, gold has effectively stalled as the U.S dollar flailed around a little. The metal may continue dropping back a little over the rest of the afternoon, but any significant decline would be a curve ball. Nor does there seem to be any reason for it to go up significantly. I'd guess that gold will end up close to the $1,090 level at the end of the day.

Update 2: As it turned out, I was too conservative with that guess. The pullback effectively ended when I posted the last update; the afternoon low was just above $1,086, reached at 1:20 PM ET. Starting at about 2:05, gold began climbing again, reaching the $1090 level at 2:20 and staying above it for the rest of the session, except for a small down-blip between 3:05 and 3:20. The rest of the trading session saw a slight climb, but it was enough for gold to close at $1,092.40 for a drop of only $0.20 on the day. The rest of today's action meant that gold kept almost all its gains from yesterday.

The Kitco Gold Index credited gold with a $3.65 gain on the day due to predominant buying; a $3.85 loss was attributed to U.S. dollar strength. The KGI's close of 877.16 is not that far away from its two-month high of about 887. In the channel it's been in for the last two months, the Index had gotten above 880 before dropping back. The low has come around the 850 area.

Despite the volatility today, the kind that brings cold sweats (and sometimes whipsaws) to thinly-margined FX traders, the U.S. Dollar Index had a fair bit of strength. It traded in a sloppy range from about 1:25 to 2:10; by 2:15, it had broken below the floor of 80.33. The decline lasted until it bottomed at about the 80.3 level, at which it paused until 3:00. Another rally proceeded, which U-turned into a decline that took the Index down to 80.24 as of 5 PM ET. This daily chart of the greenback, from, shows that the Index put in a better performance than the trading range I had assumed was coming:

The greenback made an interday high that bettered last Friday's, taking the Index to a level not seen since early July of last year. The candlestick for today's trading looks a lot like that of last Friday, except the body's top is at a slightly lower level and the upper "wick" is longer. The MACD lines in the lower part of the graph are close to crossing, and may next Monday or Tuesday.

A similitude between this Friday's trading and last Friday's was not evident in gold:

Last Friday, gold hit a low not seen since late October. This Friday's candlestick has a similarity of appearance to that of seven days ago, but came close to making a weekly high rather than making for a four-month low. All in all, gold's done very well today given that U.S. dollar's strength and the tightening announcement from the People's Bank of China. The dollar fed off that announcement and its effects on the U.S. stock market. Gold was affected by it, but the negative impact was shaken off by the end of the day - a far cry from the effect the first announcement had. The recovery this week from last week's hammer-down meant that spot gold gained $27.40 on the week, or 2.57%. More than all of last week's decline was erased this week.

That says something, especially the last datum. Thanks to this week's recovery, the MACD lines at the bottom of the graph have crossed into what ostensibly would be a bullish pattern. Since gold's been in a secondary downtrend, this indicator hasn't been all that reliable. More telling is the RSI line, which is still at the level at which it was before the Eurocrisis surfaced.

The Gold/GLD ratio ended the week at 10.21 after it mostly being in the lower end of its day's range. This ratio, which is the price of gold divided by the price of a share of GLD, is graphed here. If below 10, then physical gold is selling at a discount to paper gold.

Next week's trading is going to be significant. If gold keeps rallying, then the latter indicator will put in a stronger showing than last time - even if gold's at a lower price than last time. The MACD indicator whipsawed becasue of the Eurocrisis; it not doing so this time would indicate more normal market behavior, and a better chance for a real run-up. There's been hints that gold is now benefiting from a post-crisis hangover as the cost of the still-sketchy Eurobailout sinks in. In Euro terms, gold did much better this week. This graph of gold divided by the AMEX Euro Index (XEU) shows an upward channel since the late-December low, and a level that's not far from making a new two-month high:

All and all, it's going to be an interesting (if shortened) week...especially since the gold price is moving away from the level at which many physical buyers see it as a bargain. Thanks for reading, and enjoy the long weekend.

30-Year T-Bond Auction Suggests Inflation Ahead

That's the conclusion of Seeking Alpha contributor "The Housing Time Bomb," who points out that the disappointing 30-year T-bond auction two days ago suggests that the bond market is concerned about inflation, not deflation.

Included is a chart of Japanese 30-year govermment bond yields, which I've reproduced below:

The deflationary (actually,stable-price) episode begain in 1990, right after the peak in the yield curve. From then until 1993, there was a smooth drop in the yield, after which a several-month countertrend intruded. Then, yields kept falling until about 2000 and have stayed down since.

Compare the 1991-3 period to this graph of 30-year U.S. Treasury yields, from early 2005 to today:

This graph shows a different picture from the Japan one. Instead of a long-term fall, U.S. long rates took a three-month tumble and have climbed back up. As of now, long Treasuries are at about the average yield for the last five years. Since May of last year, there's been a wide trading range. The pattern of rates from June to this month looks a lot like March-October of '05.

Many gold skeptics have said that long bonds have not discounted any real inflation in the future. The above pair of charts is the counterpoint: unlike the Japanese bond market, U.S. long bonds are not discounting any deflation (or, for that matter, further disinflation) in the near future. If the U.S. economy going forward is destined to be like the Japanese economy of the 1990s, that "Lost Decade" is going to arrive in the form of another black swan. The bond market doesn't see it happening.

The argument and commentary that goes along with the first graph is here. It's well worth reading.

A Dark Portent?

Globe and Mail blogger David Berman has a post that opens up with an old contrarian indicator: when an investment appears on the cover of a major newsmagazine, or is mentioned in the normally-ignorative mainstream media, then it's time to get out of it. He mentions an Esquire journalist touting a leveraged investment, and marshals other blogger's posts that show this fellow doesn't have a very good track record when his opinions are published in Esquire.

The trouble is, the investment in question is a leveraged gold fund.

The question almost begs itself: is the gold bull market over, or is this a fake-out of naive contrarians? To repeat points I've made earlier, gold has not spread all that much from its usual subculture; so far, there has been interest in the regular-investing world but also a lot of skepticism. If gold goes into a bear market from here, then the gold bubble I've been expecting will have never really gotten off the ground. So far, except in the usual haunts, there has been no gold mania. It was deflationism that took the world by storm, not inflationism.

Another factor to consider: at this stage of the business cycle, except perhaps for China, we're not at the blow-off/inflationary stage; we're in the recovery stage. Rather than inflation being a serious worry, and central banks taking steps to clamp down on money-supply growth, we're seeing central banks at least trying to expand briskly. Some, it's true, would argue that they're expanding impotently. There are two ways to interpret that last claim.

There's only one way that the above-mentioned Esquire article could be the signal of the gold bull's end: if inflation vanishes and is replaced by a spell of deflation instead. I don't see that happening, because central bank officers are far too vigilant about the deflation threat and shrinking credit. It's almost a certaintly that more quantitative easing will be called forth by any double-dip slideback; there's still too much debt out there that's still too vulnerable to a downturn. One example, recently mentioned by Elizabeth Ann Warren, is U.S. commercial real estate loans.

Another dip in the economy will likely trigger another run of trouble for the banking system. Central bankers know it.

The only macro kicker that could result in a gold bear would be a hard landing for the Chinese economy kicking in, soon.

Michigan Consumer Sentiment Indicator Down

That's according to Marketwatch, which has the number at 73.7. The number was well below the forecast of 76.

After somewhat of a rally after the retail-sales number was released, gold fell as the U.S. stock market tumbled. That fall has been reversed somewhat as the U.S. Dollar Index tumbled when the news went out. From a stock-market induced high of 80.66, it fell as far as 80.3161 with the climax of the fall taking place as the news hit. Since then, it partially rebounded to the 80.45 level after dipping again. After being pushed down about ten dollars an ounce from 9:20 to 9:40, in sympathy with the lousy open for U.S. stocks, gold has recovered to above $1,082 in reaction to the tumbling dollar. The China tightening move is being blamed for the earlier-morning drops in both stocks and gold.

Another Gold-Bull Rationale

Gold bulls tend to be cynics, so it's not surprising that there's another rationale for a rising gold price now that a ballooning of excess reserves has not turned into an exploding money supply. The central banks of at least two developed countries, including the Fed, have launched quantitative easing programs in order to prevent deflation. On the fiscal side, deficits have exploded. Those deficits signal more quantitative easing in the future in order to keep interest rates down, so goverments' interest-servicing burden doesn't become onerous.

That's the case, and the managing director of Salida Capital shares it:
With rampant consumer borrowing having been replaced by rampant government borrowing, Greece and other European Union countries are making the headlines right now. But the problem is not limited to them. In fact, this is a global issue that most OECD nations face, says Brian Trenholm, managing director at Salida Capital.

He expects the result will be trillions of dollars of new bonds will need to be sold. But who will do the buying?

"I think the answer will ultimately be central banks," Trenholm says. "While the Fed's quantitative easing program is set to expire in March, I'd be shocked if we didn't see a follow-up program. I think quantitative easing will be with us around the world for a long, long time."

This is the dream scenario for gold in particular and scarce commodities in general, the portfolio manager notes....

That's the game plan for gold bugs who don't groove to the hyperinflation scenario. Deflationary tendencies in the economy will be fought by governments, and expansionary monetary policy will be added upon expansionary fiscal policy to do so. The two forces will result in a temporary standstill, during which future inflation will be baked in the cake. As has usually been the case ever since the still-warned-about 1930s, both the Treasury departments and central banks will overshoot in retrospect. That overcompensation is what will bake the inflation in the cake. Once the economy gets rolling again, and the deflationary liquidation tendency either disappears or becomes dormant, then the counter-deflationary stimulus will again have the effect of overstimulus...and will be seen as such in retrospect.

To be fair, there's a systemic bias towards overstimulus because normal inflation takes a long time to get out of hand. Except in cases of genuine hyperinflation, which also take some time to get rolling, there isn't any One-Hoss Shay element to inflation. It's believed by almost everyone that deflation does make the economy a One Hoss Shay, which will collapse of its own accord quickly.

Central banks, therefore, act on this political calculus: Inflation is a problem, but one that takes some time to appear; it can be scaled back without major disaster should the necessity arise. Deflation is a disaster, which strikes out like a cobra when quickened. Thus, quick action is needed to prevent deflation at all costs. In contradistinction, inflation need not be treated as a national emergency because pulling back from the brink can be done in a relatively orderly matter. Hence, erring on the side of inflation when deflation makes its appearance is rational given those two differences.

With the exception of Germany, no developed economy has suffered hyperinflation over the past century. France and Italy did have serious inflation problems, but their inflations didn't gut their economies. On the other hand, all developed countries' economies have been gutted by deflation. Hence the skewing of priorities in central banks' responses to each.

The above may sound cynical, but it's merely a sketch-out of well-known political realities. The '70s are not remembered fondly, but that decade lacks the panic-inducing qualities that the '30s still has. At least from the political-optics angle, the inflationist case has sense: there is a bias towards inflation in the system.

Chinese Tightening Intrudes Once Again

The spike-up that started off evening trading (ET) didn't last. Instead, gold reversed direction and drifted down below the $1,090 level last night. The drift reversed somewhat, pushing gold above $1,090 again, until a decline got rolling at 2 AM ET. Between then and 5:30 AM ET, gold dropped in an accelerating decline until bottoming at about $1,078. Yo-yo'ing in the next half hour got the price down to $1,076.20. Then, gold climbed back up a bit to the $1,085 level. As of 7:58 AM ET, spot gold was $1,085.70 for a drop of $6.90. Surprisingly, the Kitco Gold Index has gold up if the U.S. dollar's strength is factored out.

The PRC, as it turned out, did have a gold-dropping surprise in store. The People's Bank of China announced more tightening measures, ordering a reserve-rate hike for the second time in a month. Yesterday, it was reported that Chinese lending in January was an eye-raising 1.4 trillion renminbi - almost 1/5 of the total 2010 loan ration in 1/12 of 2010. Given that item, further tightening by the PBoC isn't really that shocking.

The news, however, gave a shock to the U.S. Dollar Index: an upwards one. The Index climed above the 80 level last night, and stayed just above it in a range until just before 2 AM. The first move was downwards, in a test of the 80 floor, but the next moves were strongly upwards. The Index vaulted up in three stages starting at 2:25 AM, from 80.09 all the way up to 80.75 right after 6:30 AM ET. That peak slightly bested the previous seven-month interday high for the greenback. Since then, the Index pulled back to just above 80.5. As of 8:14, it was at 80.57.

Naturally, the latest Bloomberg report attributed gold's drop to PBoC tightening. As the first quoted expert confirmed:
“Gold is reacting to liquidity constraints implemented by the People’s Bank of China and a further strengthening of the dollar,” said Bayram Dincer, a commodity analyst at LGT Capital Management in Pfaeffikon, Switzerland.
The article also contains a somewhat uncertain stance that's derived from a straw poll: "Nine of 22 traders, investors and analysts surveyed by Bloomberg, or 41 percent, said bullion would rise next week. Six forecast lower prices and seven were neutral."

The same reason is given by a Wall Street Journal Online report, which anticipates the retial-sales numbers and the University of Michigan consumer sentiment index as being the big drivers of the gold price, as well as oil-inventory data. The January retail-sales number was a gain of 0.5%; the expectation was for a 0.3% gain.

A Globe and Mail-webbed Reuters report also fingers PBoC tightening, and notes that the usual inverse correlation betwen the greenback and gold has reasserted itself. It also mentions the metal's upturn in terms of the Euro. In terms of that currency, it's closing in on a new high:
Gold priced in euros performed particularly well on Thursday, rising 2.8 per cent to a peak of €802.73 an ounce, within €10 of the record high it hit in December.

The metal eased on Friday to €795.92 an ounce from €799.49 late in the last session, but from a technical viewpoint it is well positioned to make fresh gains, analysts said.

“Since early December, gold denominated in euros has been locked in a well-defined contracting range,” said technical analysts at Barclays Capital. “Now that range is on the verge of giving way for a resumption of the larger bull trend.

“A break of 802 would confirm (this), pointing to a re-test of the 813 December high. However, this should prove to be only a temporary stopping point as the measured move... targets the 856 area before greater signs of topping emerge.”...
The article also notes that the SPDR Gold Trust's holdings were unchanged yesterday.

Speaking of other currencies, the one-year chart of the Kitco Gold Index shows a different picture for gold once the U.S. dollar is factored out:

The Index, graphed by the blue line, shows a channel for the past two months. Had it not been for the U.S. dollar, gold would have been in a range.

Reaction to the retail-sales release has been a slight uptick in gold and a push-down of the greenback. The metal slumped to below $1,083 by 8:30 AM, but moved up a bit after the report hit the wires. As of 9:50 AM ET, spot gold was at $1,085.70; the Kitco Gold Index had gold down $0.60 due to predominant selling. The U.S. Dollar Inded moved more definitively, droping from 80.5875 as of 8:30 to just below 80.50 as of twenty-five minutes later.

Given the expectation of no major gold-affecting news items as week's trading comes to a close, there's a good chance that gold won't do much today...if there's no noon-time excitement.

Thursday, February 11, 2010

Surprising Gold Strength

The U.S. Dollar Index has been on quite a run this morning. From about 80.1 as of 9 AM ET, it's marched up to 80.50 as of one hour and fifty-two minutes later. That's close to its recent eight-month high set one week ago. It has backed off since that high point, but only partially.

This kind of strength in the greenback has, especially in recent days, accompanied a slam-down in gold. As of 11:30 AM ET, however, gold wasn't been following the script: it was at $1,082.20 and up $11.50. Surprisingly, the Kitco Gold Index divided up the gain into a $3.40 loss due to U.S. dollar strength and an unusually large $20.10 gain due to predominant buying.

Interestingly, the news item that fits both scripts is an announcement of a deal to rescue the Grecian government from its woes. It's been interpreted as being good for gold and bad for the Euro, meaning that gold's been ramping up in Euro terms since the announcement was disseminated around 9:30 AM. It's consistent with gold holding steady while the U.S. Dollar Index was ramping up.

This morning's trading has some similarily to gold's performance one week ago, the day of the big slam-down. What had previously been a large cumulative gain due to predominant buying turned out to be an air pocket. One week ago, gold was hammered down in the morning as well as in the afternoon. Today, despite the briskness of the greenback rally, gold was hardly pushed down. As the greenback pulled back, gold took off.

There's reason to be skeptical about this rally, given what happened last Thursday, but there's little doubt that gold's gotten some upward momentum. The afternoon's session will show if the momentum holds. To be frank, an afternoon slamdown looks like a no-show.

Update: There wasn't even a hint of one. The greenback stayed in a range at around the 80.10-80.15 level since the initial post, with a few pokes at the downside that cumulated in a drop to 80.07 as of 1 PM ET. Gold's run continued all the way up to the $1,095 level before backing off somewhat: even with that secondary reaction gone quiescent, gold's still well above the $1,090 level. As of 1:05 PM ET, spot gold was at $1,091.30 for a gain of $20.60 on the day. Surprisingly, the Kitco Gold Index had gold being pushed down a little due to the strength of the greenback.

An updated Bloomberg report starts off with these two causes: "Gold climbed to a one-week high in New York as signs of an economic recovery boosted demand for commodities and as some investors sought a haven amid concern over Greece’s finances." A quoted expert elaborates:

“Gold is moving along with all of the commodities,” said Adam Klopfenstein, a senior market strategist in Chicago at Lind-Waldock, a unit of MF Global Holding Ltd. “There’s some economic optimism that’s bringing in buying. People want to embrace gold with the overall risk tolerance that is coming back into the market today.”
Essentially, in other words, gold is participating in a commodity-wide relief rally. Today's rally in oil gibes with this assessment.

There have been two times in the day when gold's been hit: early-mid morning, usually right after COMEX/NYMEX trading opens, and around noon. As a hit time, the latter's been less frequent than the former. Both timeframes have passed, and there hasn't been any sustained downturn. Today's surge, if air-pockety, is well-covered enough to be treated as solid. The greenback ended up being somewhat co-operative by dropping back, allaying the worry I penned above.

The rest of the afternoon might see some unusual action...

Update 2: As things turned out, there wasn't; the gold market settled into a range not atypical for the last four hours of regular trading. The metal stayed in the $1,090-$1,095 range until about 2:30 PM, when it briefly got and stayed above the top end. The day's high of $1,097.60 was made at about 2:50. That breakthough failed to hold, and gold descended back into the same channel until regular trading ended. At the close, the metal was priced at $1,092.60 for a gain of $21.90 on the day. The Kitco Gold Index divided the day's gain into $21.30 due to predominant buying and a mere $0.60 due to strength in the greenback.

The U.S. Dollar Index did lose a lot of its strength today. but the bulk of that loss took place in late morning and early afternoon. By 1:50 PM ET, the Index had settled into a holding pattern with 80 as the floor. That floor was breached for about a half an hour, but was restored by 3 PM. At 4:30, however, the Index sunk below the 80 level again; this time, the drop was more durable. The greenback spent the rest of the regular-traing day slightly below 80 but still hugging that value. As of 5:30 PM ET, the Index closed at 79.99.

A Reuters report explains the rise this way:
U.S. gold futures ended above $1,090 an ounce on Thursday as investors turned to the metal as a hedge against currency market volatility after news that European governments agreed in principle to support heavily indebted Greece.
In other words, gold's rise was engendered by dissatisfaction with the Euro and the absence of the greenback being a compelling alternative. Crisis over, the U.S. dollar no longer's an automatic money grabber.

There's a significant echo of 2008 in the events of the last week. In both crises, the U.S. dollar rocketed up and gold plummeted. Then, gold climbed back up as interest in the grenback faded. It's evident that, although both are crisis hedges, traders buy the greenback when they hit the panic button. Gold becomes attractive once the storm is gone and the U.S. dollar no longer looks that compelling. It's possible someday that the panic button will be re-wired from "Buy Greenbacks" to "Buy Gold," but that day has yet to arrive.

A brief Marketwatch report explains the connection:
Gold's surge this morning was due to relief that the European Union's pledge to help Greece appeared to involve no sale of the precious metal, according to RBC Wealth Management. "The European Central Bank has annual gold sales pacts with member banks," said George Gero, metals analyst at RBC, in emailed comments. But the EU's pledge to help Greece, though it contained few details, led markets to believe that "Greece will be handled without having to sell gold," Gero said.
So, there is substance to the above one-two reaction; it's not merely panic.

The six-month daily gold chart, from, shows a short-term recovery that's clearly underway:

Of interest are the RSI index at the top and the MACD indicator below. The latter is on the cusp of a crossover, although at an unusually low level. The former is almost at 50, the same level at which it topped out before the hammering one week ago. Things are going to be dicey over the next few days: if renewed trouble surfaces from Euroland, to the benefit of the U.S. dollar and detriment of gold, we'll see the same fake-out on the chart. Gold would likely dive down to new 2010 lows. On the other hand, if the Eurocrisis is truly over and inflation news begins to move the market, then we'll see a more durable rally extend itself.

The chart of the U.S. dollar shows a surprising amount of interday volatility today, but with little change from the previous day's close:

According to another daily chart, this one from TFC Commodity Charts, the open interest has fallen somewhat as the later stage of the rally has continued:

One notable difference between this pause and the one in late December is that open interest is declining this time 'round, while open interest expanded for more than a week during the last psot-peak drift.

The gold/GLD indicator, calculated by dividing the price of gold by the price of one share of GLD, was surprisingly low today even though it closed at an above-average 10.23. Its interday low was 10.01, just one tick away from the 10 level that marks the gold-at-a-discount zone. The ratio chart for it is here.

Today hasn't been all that surprising for the greenback, but it was for gold. Given the carnage recently gone through, however, it seems premature at this point to say that gold's on another sustained roll. Absent a black swan of the bad kind, though, the metal should stay well above last week's carnage low.

Gold And S&P Are Converging Over Time

Moby Waller has two graphs in his article "Gold and the Markets: The Correlation Is Increasing" that show this convergence; he uses the SPDR Gold Trust (GLD) and S&P SPDRs to make his point. There was actually a '07-'08 divergence, pre-Bear-Sterns, and an '08-'09 one: post-November to March. Since then, the S&P and gold have moved in virtual lockstep qualitiatively. He concludes by saying that a more inverse correlation is more normal, and the positive correlation between the two will eventually dissipate.

The most likely scenario for that dissipation would be for the stock market to resume its uptrend, as the recovery kicks in, while gold languishes - not because of U.S. dollar strength, in and of itself, but because there would be little sign of inflation on the horizon. Recovery turning into stagflation would make the correlativity negative again, as it was in late '07 to early '08.

Dubai Proposes New Legal-Tender Bullion Coin

As reported at, Dubai has proposed minting a new legal-tender gold coin:
In September 2007 the DMCC minted the first ever UAE commemorative gold coin featuring the Ruler of Dubai Sheikh Mohammed bin Rashid Al Maktoum (see above). The proposed design for the new currency has the President of the UAE, His Highness Sheikh Khalifa bin Zayed on one side and the world’s tallest building, the Burj Khalifa on the obverse....

Among gold bugs there is bound to be immediate speculation as to whether this would mark a step towards a gold-backed currency in the UAE. But that is clearly a very presumptive and premature conclusion as the UAE does not presently even have any official gold reserves.
The post concludes with the reasonable guess that Dubai simply wants to mint a coin that's competitive with bullion coins such as the Maple Leaf and U.S. Gold Eagle.

Hope Still Springs Eternal, Next Installment

Jeffrey Nichols, in an article posted at Moneyweb, is predicting $1,500+ gold for some time this year. His reasoning is as follows: due to the credit crunch, the severe recession, and central bank response to both, stagflation is baked in the cake. He believes that the U.S. dollar's position as the #1 safe-haven asset is irrational, and will end:
At some point, sooner or later, the European Central Bank, for all its talk of monetary restraint, will be forced to circumvent the prohibition barring purchase of member-country public debt. Like the Fed in the United States, the ECB will be forced to monetize the public-sector deficits of its most fiscally profligate members.

Here in the United States, private rating agencies are warning that America’s own “triple A” rating on Federal debt is at risk. Meanwhile, states ranging from California to New York are in shoddier shape fiscally than Greece . . . and, it remains to be seen, how Washington policymakers will bail out individual states that, by law, may not run budget deficits.

Just imagine how much worse America’s fiscal dilemma will be as U.S. interest rates (and, hence, U.S. Treasury borrowing costs) begin to rise, either from a tightening of monetary policy or, more likely, as rising inflation expectations are reflected in higher nominal interest rates....

As we have said repeatedly, today’s perception of the greenback as a “safe haven” preferable to gold, the “ultimate” safe haven, makes no sense. At some point, sooner or later, gold will disassociate itself from the dollar’s exchange rate against the euro and other industrial-country currencies - and begin appreciating against all of these currencies.
He also cites Asian demand for physical gold, which not only is price-sensitive but also is income-sensitive. Continued growth in China will add to demand increases because of increased buying power.

In addition, he holds out the possibility of the People's Bank of China buying the 190-or-so tons of IMF gold still on sale. He believes Chinese officials are holding back for reasons of face, because they'd rather buy at a lower average price than India's. "Should prices dip below $1,045 China might make a fast deal acquire gold directly from the IMF. Although, this would be an “off-market” transaction, the announcement effect alone would likely give the gold price a good kick up."

His reasons make some sense, but it would be a tall order for gold to increase more than 43% from last week's low of $1,045...assuming that Feb 4th's interday low proves to be the low of the year. Stellar years like '09 tend to be followed by consolidation periods; we're in one now, which looks likely to last for some time.

Gold Rises Slightly As Drop In Chinese Inflation A Non-Event

Inflation in the PRC dropped to a one-year rate of 1.5%, far lower than expected and lower than last month's rate of 1.9%. Perhaps paradoxically, the news that Chinese inflation wasn't that bad pushed the price of gold up slightly. After ending regular trading at $1,070.70 yesterday, gold started evening trading with a boost above the $1,073 level. $1,075 was surmounted a little before 8 PM ET, and the metal stayed betwen that level and $1,080 for the rest of the night and early morning. A ramp-up above $1,080 at about 5:20 was followed by a drop to $1,073.30 that ended at 4:20. After spending some time at the $1,075 level, gold climbed back to the upper end of the range. As of 7:39 AM ET, the metal's price was $1,078.70 for a gain of $7.00 on the day. Almost all of it was due to predominant buying.

After staying above the 80 level in the late afternoon, the U.S. Dollar Index went for a tumble during the night, which lasted until very early in the morning. It bottomed at 79.0 around 12:40 AM. After that decline, the Index climbed back up to just below 80, after which it slid back down a little. A steeper rise commenced from the 79.83 level around 5:25 AM, taking the Index up all the way to 80.05 before exhausting itself. A sink-back to the 79.87 level preceded another leap to 80.04 before another pullback took place. As of 7:48 AM, the Index was at 79.94 and inhabiting a range centered around the 80 mark.

The U.S. dollar was once again cited as the prime mover of the metal in a Bloomberg report webbed by Business Week. The first expert quoted says that the rise doesn't seem very solid:
“As the dollar retreats somewhat, demand for gold is reviving,” said Jeon Yeong Min, a trader at Hyundai Futures Co. “The gains don’t look so convincing at the moment, as Greece’s problems are heavy on the minds of market players.”
Marc Faber is quoted as saying in a Bloomberg TV interview, '“I won’t rule out that gold will go down to $950 or $1,000, but I don’t expect more downside... I don’t see any scenario where gold will collapse.”' For him, that's pretty bearish; coming at a time when gold's close to hugging its yearly close-low, it has some significance.

An impending bailout of Greece is also cited in a Reuters report, which also fingers the greenback as the main influence:
"The gold price is trading in sympathy with the euro/dollar this morning as markets are waiting for confirmation and details of a potential bailout plan to Greece by euro zone member countries," said BNP Paribas analyst Anne-Laure Tremblay.

"While the details of a plan are unlikely to be given today, an explicit commitment to support Greece would probably provide some reassurance for markets," she added.
In the latter part of the story, it's noted that Asian demand is still robust. If Chinese numbers disappoint, Indian numbers shouldn't. [Another report, however, says that price sensitivity amongst Indian jewelry buyers still exists even though it's wedding season.] Also noted is that the holdings for the SPDR Gold Trust remained unchanged yesterday; they're still at 1,106.38 tons.

This report, by Adrian Ash, explains the night rise in the gold price as the result of short covering plus some European buying. Two quoted experts both expressed caution admixed with long-term reassurance:

"Our short-term view [on Gold Bullion] is bearish," says today's Commodities Daily from Standard Bank, because the current "strong physical demand" will likely fall away after next week's Chinese New Year.

"This kind of respite in the Gold Price will allow [the Middle East and Indian] markets to recuperate a little bit," says Jessica Cross, CEO of London's VM Group consultancy, speaking on Mineweb's weekly podcast.

"Because at the end of the day we have to have physical coming off the market, and those physical areas really do support the supply demand balance in the long run."

This chart of the gold price, going back two years, has an indicator at the bottom I want to focus upon. The indicator in question, the Full Stochastic, is the only one on the chart:

I want to call attention to a negative divergence on the right hand of the full-stochastic graph. Een though gold's most recent low was lower than the last, the stochastic bottomed at a higher level than it was at the last low. It was lower still at the higher low set in late December. That divergence is supposed to signal a reversal of trend. The last time this pattern asserted itself was in August and September of 2008. Back then, the divergence preceded an explosive relief rally that evaporated and turned into a lower low as of late October. There hasn't been a relief rally to the same extent this time 'round, so the chances of a turnback plummet are low. It's possible that a new low will be made due to some further dollar-boosting event. However, it looks like the divergence may be signalling a turnaround. This guess gibes with a contrarian interpretation of the bearish or cautious near-term sentiment expressed above.

As of 7:45 AM, gold is above $1,080 after making a leap up to $1,086.60 that took place shortly after regular trading opened. The gain of $10.30 from yesterday's close is portioned by the Kitco Gold Index into an $11.45 gain due to predominant buying and a $1.15 loss due to the dollar's strengthening. After sagging at about the time the spike-up in gold took place, the U.S. Dollar Index has gained as well: from 8:02 to 8:50, it's climbed from 79.90 to 80.1. A surprise sharp drop in the jobless-claims numbers was the cause. The combination of a gain in gold and a gain in the greenback is odd, and doesn't bode well for one of them. Recently, it's been gold that's suffered; that same pattern may recur today.

Wednesday, February 10, 2010

Gold Drops, Rests, And Climbs Back Partially

The relatively mild drop between 8:15 and 8:30 AM ET proved to be a preface for a more serious drop between 10:00 and 10:15. In between, gold's price declined mildly. Overall, the downtrend took about $20 off. Subsequently, gold bounced up, dove to a new low of $1,061.40, and climbed up somewhat. As of 12:04 PM ET, gold was at $1,068.60. The $9.90 decline on the day was split almost half-way by the Kitco Gold Index: a $5.00 drop due to predominant selling and $4.90 due to greenback strength.

Turning to the U.S. Dollar Index, it did make a double top at the 80.3 level after leaping up from below 80 at about 10 AM. The first part of the double was made around 10:35, and the second between 11:15 and 11:25. Following that double top, the Index did a U-turn and fell back to the 80 level. As of 12:10, it was at exactly 80.

Undoubtedly, the movement of both was influended by Fed Chair Bernanke's testimony about unwinding the liquidity-provisioning programs born of the financial crisis. He didn't mention a rate hike explicitly, but did state that hiking the rate paid on excess reserves would be used to keep inflation bottled up. He also mentioned raising the discount rate to a normal premium over Fed funds and selling some securities to lessen those reserves somewhat. Selling the Fed's MBSs is off the table until the recovery is solid. Reverse repos also can be used as a warning shot, to signal in advance a more determined tightening. The markets took it in stride, all told, but inflation-linked asets dropped.

The day's rout looks over, and gold is likely to be range-bound around $1,065-$1,070 from here. Despite the recent greenback weakness, a return to below 80 isn't likely.

Update: As it turns out, I was too pessimistic about gold. Gold's actually recovered most of its daily loss, and is above the second, deeper stage of the morning decline. The run I thought would peter out kept going until the $1,074 level, reached just after 12:30 PM ET. A pullback kept gold well above the $1,070 level. As of 1:36 PM, the metal's at $1,073.60 for a decline of $4.00 on the day. The Kitco Gold Index attributed all but 70 cents of it to strength in the U.S. dollar.

Despite that overall strength, the decline in the U.S. Dollar Index did resume after it levelled out for a time. After being broached around 12:35 PM, the Index sunk below 80 forty minutes later. As of 1:40 PM, it's marking time slightly above that level.

If the rest of the day is going to be like most, then gold won't do all that much from here. A sustained breakdown from the 80 level by the U.S. Dollar index would keep the early-afternoon gain rolling.

Update 2: As it turned out, gold did drift down somewhat afterwards. The high reached around last update's time proved to be the second part of a double top, which prefaced a slight decline down to the $1,069 level. The metal started rebounding slightly at 3:35 PM ET, reached $1,072, and then sunk a bit before closing regular trading at $1,070.70. $1,075 wasn't reached, but $1,070 was surmounted and held.

That four-dollar drift-up was not prompted by a fall in the greenback. Trading has been quiet for the U.S. Dollar Index in mid-afternoon. As it turned out, 80 was not breached on the downside; it was merely poked at. A drop to 79.975 between 2:25 and 2:30 proved to be a mere spike that was erased in the next five minutes. From 2:00 to 3:35, the Index was range-bound between 80 and 80.05. As gold drifted up, the greenback didn't follow. Instead, the Index drifted up at that same 3:35 PM, which put a little pressure on the metal to come down a bit. The upswing ended at 80.09 as of 4:15, and the Index drifted down to its previous range.

For the day, gold lost $6.90. The Kitco Gold Index allocated the loss to $3.70 due to strengthening of the U.S. dollar and $3.20 due to predominant selling.

This Reuters report pegs the loss as largely due to Ben Bernanke's comments during his Congressional testimony:

"Gold is down on the Bernanke comment because it boosts the dollar by talking about removing government stimulus as well as easy monetary policy," said Tom Hartmann, analyst at California-based Altavest.

Bernanke detailed how the Fed would likely begin tightening monetary policy by removing cash from the financial system before it turns to raise benchmark short-term interest rates, even as he stressed it was not yet time to do so.

Hartmann said that investors would likely sell into possible near-term rallies in gold because the Fed's monetary exit removed the possibility of inflation as it started pulling back economic stimulus.
Gold actually wasn't pushed down all that much, given its gains yesterday, even though that's largely because bargain-hunting has been keeping it up. A trader quoted later in the story said that gold traders were keeping close tabs on the greenback and adjusting trades accordingly.

A Wall Street Journal report mentions the same factor, along with continuing worries about the Grecian fisc, but has this pithy quote near its end: '"Most of the [U.S dollar] trade right now is a confidence play," said Daniel Pavilonis, a senior market strategist with Lind-Waldock.'

As a side note, things have gone quiet in China as far as the gold market is concerned. There have been no items of influence for some time now.

These daily charts of both gold and the U.S. Dollar Index show holding patterns in both.

The gold chart shows the metal struggling along just above its newer bottom level. The old interday low of $1,075 has become close to a short-term interday high. It hasn't been that hard recently for gold to get above $1,075, but it has been difficult for the metal to stay above that level.

As noted above, the main reason is the continuing strength of the U.S. dollar:

The chart of the Index shows a day's pattern that's a little unusual during this two-month run. The Index was up on the day, but it high was barely above the low set last Friday. The greenback may stay stuck at this level over the next few days.

The Gold:GLD ratio, calculated by dividing the price of gold by the price of one share of the SPDR Gold Trust, closed at 10.2 today - effectively at its average. (Because GLD is made up of paper gold, each share representing 1/10 of an ounce, it typically sells at a slight discount to gold itself. A discount is shown by a ratio value of greater than 10.) Since the last time it went below 10, gold has climbed up a bit but not by that much. A six-month graph of it is here.

This day's trading did contain yet another downdraft this morning, but it was reversed partially in the afternoon. Recently, a reversal of this sort has been normal; for whatever reason, it doesn't seem that susceptible to arbitrage. Perhaps there's too much of an "ouch" factor in those days when gold plummets in the afternoon for such arbitrage to be worth anyone's while. Perhaps the trend is too recent to be counted upon. Perhaps the overall yield relative to risk commitment isn't worth the trouble.

As the U.S dollar get higher and higher, more and more gold traders seem to be focusing on it - with some good reason, as the fate of gold is closely tied to the fate of the greenback. I just note in closing, and in passing, that such crystallizations are usually snapped by outside events intruding. I can't think offhand of what would cause gold to decouple from the greenback, but such an event may be coming. Just a closing thought.

Gold's Technical Situation Still Not Good, Warns Seeking Alpha Article

It's by "Gold Core," and it uses a variety of technical indicators to conclude that the near-term outlook isn't good for the metal. (It was published before gold dropped below $1,075.) Interestingly, the author marshals fundamental reasons to make the case that gold will stay above $1,000.

There's not much to say after gold's fall to just above $1,060. Sentiment-wise, the current gold market isn't an unambiguous read because timing bearishness is often masked by reaffirmation of bullish fundamentals. Last Thursday's drop below $1,050 may have been a climactic bottom, but sentiment didn't seem to erode as much as such a bottom would do. Perhaps, we're in for a frustrating grind where hopes are raised and then dashed.

Gold Breaks Below $1,075 After All

And, largely, the prompt was the greenback. The U.S. Dollar Index vaulted well above the 80 level just before 10 AM ET. Just afterwards, a pause in an earlier decline ended and gold rolled downwards. The Index, after marking time at the 80.25 level, is currently trending upwards. Gold has been mostly knocked down by predominant selling according to the Kitco Gold Index. As of 10:26 AM ET, gold's at $1,063.80 and looks likely to test the $1,060 support level.

Taipan Daily Asks A Pregnant Question

The question is, "Does China Want a Lower Gold Price?" The answer given is "yes," in the short term. On a more quotidian level, the PRC is flush with U.S. dollars and has an incentive to diversify.
In the long run, China craves power (or at least the mandarins who run the place do). Economic power, financial power, military power, you name it.

In getting from here to there – from a world where America is top of the heap to a world where China is – China will have to do a few key things to see its geopolitical ambitions met. It will have to dig out from under a mountain of paper dollars. And it will arguably have to build up a massive stash of gold, much bigger than the one it has now.

The strategic nature of this endeavor creates some odd incentives in the short term. Think of two large investors: one who is trying to quietly buy up the shares of a small public company, and another who is trying to get rid of a massive stake.

Gold is like the small public company in this analogy. The total “float” of gold available for purchase is tiny – a few trillion dollars’ worth at the maximum. (Much of the world’s gold is in private hands and not for sale.) China is like the large investor trying to quietly buy up shares.

Given the intimate knowledge of its own long-run plans, China likely wants to exchange dollars for gold at the most favorable price possible – which, here and now, means a lower gold price. This is no different than a large investor wanting to get the best average cost on his position.

China is like the other large investor – the one who wants to get shed of a massive stake – in terms of its divesting its mountain of dollars. In this case, it is a higher price (i.e. stronger dollar value) that is desirable, as it means a better rate of exchange on greenbacks going out the door.
So, a rising U.S. dollar gives the Chinese authorities a chance to diversify without ruining the greenback and injuring their own holdings while doing it.

Regarding geopolitical motives, some talk along that line is surfacing in the PR of C. Zero Hedge has a post whose subject is 'Senior Chinese Military Officers Join Iran In Delivering "Punch" To U.S., Propose Selling Treasuries As Arms Sales Punishment.' A perhaps unrelated follow-up post reports that "Chinese Reserve Managers Notified That Any Non-USG Guaranteed Securities Must Be Divested."

It hasn't been Chinese policy to let political considerations trump investment decisions, at least so far...

John Paulson's Gold Hedge Fund Didn't Have Draw Many Expected

As passed on by the New York Times Online's DealBook, the Wall Street Journal has reported that John Paulson has had a hard time raising money for his gold fund:
When news broke that Mr. Paulson’s firm, Paulson & Company, planned to start a fund to to capitalize on the gold rush, some gold traders were betting that Mr. Paulson would be able raise billions of dollars for the venture and that the fund might even push gold higher, The Journal said.

But after months of investor meetings, Mr. Paulson has raised just around $90 million for the gold fund, The Journal said, citing people close to the matter. The Journal noted that investors have been shying away despite Mr. Paulson having injected $250 million of his own money into the fund....
In other words, more than 70% of the fund's $340 million size is Paulson's own money. Given that his announcement was very well timed publicity-wise, and given that he's put a lot of his money where his idea is, the figure is surprisingly low.

The story itself goes into various reasons why Paulson's had trouble raising funds. Some prospective investors, who decided stay out, shied away because Paulson's main fund has about a 10% gold holding. [Evidently, he started by trying to get his regular clients to pony up.] One prospect demurred because he doesn't see inflation as much of a problem right now:
"I am a long-term believer in inflation, but I feel the weakness in the economy in the short run will trump the longer-term story" for gold, says Christopher Zook, who at CAZ Investments LP invests about $150 million in hedge funds.

Mr. Zook considered but decided not to invest in the gold fund for now. "It's purely my negative view on gold in the short run," he said. "I just am waiting for hopefully a better entry point."
Some pointed out that a leveraged bullish ETF might be able to match Paulson's own fund. Some wondered if Paulson, who doesn't have much experience in the commodity markets, is the best man to steer a commodity-based hedge fund.

There are two ways to interpret this outcome, which has fallen well below others' expectations. The first, more skeptic-oriented, would conclude that the low amount shows that gold is overhyped. Paulson's clients are sophisticated institutional investors, who aren't prone to making investment decisions under the influence of a TV commercial. They've looked at the prospects with sober and careful eyes, and decided that investing in gold doesn't make sense.

The second interpretation is that the "hype" hasn't been all that powerful or widespread as yet. Rather than push the metal's price to absurd extremes, the publicity has merely made mainstream investors aware of gold as an alternative. That awareness, largely, has not translated into follow-through as of yet. Instead of the metal's newfound press inducing a shipload of money into gold and gold stocks, only a tugboat's ration has come in. That overall reluctance is not consistent with any kind of investment mania.

As might be evident from the way I spelled each out, I lean towards the second interpretation. Most mainstream media coverage has been skeptical of the metal's prospects. The typical gold-related TV commercial these days is an ad from a gold-buying outfit, not from a gold seller. These facts suggest that awareness has spread, but enthusiam (or even decisiveness) has not. If people largely keep their heads, then there's no mania afoot.

One other interpretation: the lack of response to the gold case has led to a lot of potential demand, which won't kick in until or unless the inflation that's supposedly "baked in the cake" makes its appearance. This take isn't dissimilar to the one a Paulson fan would put forth: it's back to the lonely days of 2007 for him.

Steady Gold Went

The $1,075 support level held last night, as gold drifted slightly downwards before halting at around that level. A slight rise to about $1,079 was aborted just after 2 AM ET, and gold drifted back down to that same level. A downward test at about 5:30 AM ended with gold reaching $1,071.90, but that decline was quickly replaced by a rise to well above $1,080. Since then, until about 8 AM, gold has wavered around the $1,080 level. As of 7:59, gold was at $1,078.50 for a gain of $0.90. According to the Kitco Gold Index, gold had $2.80 taken away from its price due to strength in the U.S. Dollar and $3.70 added due to predominant buying.

The greenback did recover somewhat, although less than in last night's action. After regular trading ended, the U.S. Dollar Index entered into a narrowing corkscrew pattern centered around 79.8 before embarking on a rise that lasted from 9:15 PM to 12:50 AM. In that time, it went slightly above the 80 level but failed to hold. A two-stage decline got rolling right afterwards, which carried the Index down to 79.65. After vacillating between that level and 79.8, a double bottom was made just before 6:25 and the Index began climbing. As of 8:11 AM ET, it reached 79.96.

A Wall Street Journal Online article quotes traders as saying gold was held in a range due to uncertainties about any aid package for Greece.
Germany is expected to outline its view later Wednesday, but uncertainties linger over the extent of the aid and its implication for other euro-zone countries struggling with high sovereign debt levels.

That uncertainty over an aid plan for Greece along with a falloff in physical demand for gold, was keeping gold locked in a narrow range, traders said.
The rest of the article quotes a Commerzbank analyst as saying physical demand is on holdback, and notes that gold looks listless from the technical end.

Over at Business Week Online, a Bloomberg report holds out hope that "Gold May Gain on Speculation a Weaker Dollar Will Spur Demand." One upcoming influence may be Fed chair Bernanke's testimony to Congress about unwinding the Fed's monetary-stimulus programs. Ann-Laure Tremblay is quoted as noting, "“Investment demand in 2010 is progressing at a more modest pace relative to the second half of last year, judging by more subdued exchange-traded-fund inflows." The SPDR Gold Shares Trust (GLD)'s holdings were unchanged yesterday.

Regarding the usual driver of the gold market, Reuters quotes advisor Yuki Sonada as to whats' being watched for as eyes turn to D.C.:
"On the surface, the currency market is a main driver for now in the gold market and causing ups and downs in prices," said Yuki Sonoda, an adviser at Daiichi Commodities Co in Tokyo. "But what people really want to know is the fate of proposed regulations on U.S. banks, because that will determine money flows of risk-taking funds, and whether or not President Obama will make compromises and how," he said, referring to stalled financial regulatory reform plans....

Imposing tighter regulations on U.S. banks as proposed could send gold well below $1,000 per ounce, Sonoda said.
The regulation he's referring to are bans and/or restrictions on proprietary commodity trading - although it's a bit of a toss-up price-wise because restrictions may be placed on their commercial-trading activities too. The banks are normally commercial-shorts, sometimes heavily so.

These two charts, both from, make for an interesting contrast. The first is the six-month price of gold itself, and the second is the gold price divided by the U.S. Dollar Index:

Late last month, while gold itself was double-bottoming, the ratio chart showed a new bottom being made at a lower level than the previous one's. The two put together provide a rough gauge of the U.S. dollar's influence on the gold price. That lower bottom meant that the U.S. dollar outpaced gold in that timeframe, which can be seen as a sign that gold held up well in other currencies. It did warn of trouble ahead, but it won't if gold drops for reasons other than a U.S. dollar bull trend.

As 9 AM approaches, the U.S. Dollar Index's recovery continues; it was bumping up against the 80 level as of 8:57. Gold took a bit of a tumble right after regular trading began: starting at 8:30, the metal lost about five dollars an ounce before the slump ended. As slumps go, this one's been pretty mild for the timeframe. It drove gold down to $1,073.20 for a loss of $4.30 on the day.

Will the $1075 level end up holding today? That remains to be seen.

Tuesday, February 9, 2010

Gold Holding Steady

After rising up to the $1,080 level at about 7:45 AM ET, gold pulled back as regular trading opened. Since then, until the U.S. Dollar Index plopped down, it moved without much conviction between the $1,070 and $1,075 level. As the Eurocrisis recedes, the metal's slowly moving back to its old floor before the crisis hit - and vice-versa for the dollar, it seems.

As of 11:46 AM ET, spot gold was at $1,080.70 right after making a new daily high at $1,082. The $19.60 gain on the day has been divided up by the Kitco Gold Index into $10.90 due to predominant buying and $8.70 due to the weakiening greenback.

The U.S. Dollar Index, after rallying as high as 80.25 while gold was stuck in its range, had that rebound cut off at the knees as of 11:35 AM. In the next ten minutes, it plummeted to 79.89. Unlike the last test of the 80 support level between 7:40 and 8, this drop pushed through it and the Index stayed down. As of 11:58 PM ET, it was at 79.73.

The plunges in the greenback have been reminiscent of the recurrent ones in the gold market. It looks as if someone has heard about the record long position in greenback/euro, decided that the crisis has abated, and is playing hit-the-stops..

Update: The greenback slamdown continued until just before 12:25 PM ET, when the U.S. Dollar Index bottomed at 79.545. It wasn't long, though, until a swift reaction set in. By 12:45 PM ET, the Index reached 79.82 after rocketing up to 79.9050 shortly before. As of 1:31 PM ET, it was at 79.79 and set in a range after creeping upwards.

Not surprisingly, gold made a new daily high at about the same time the greenback hit its low. The metal topped out around 12:20 PM at $1,083.10 and then turned down as the greenback strengthened again. It touched $1,074 as of 12:45 PM, but later turned up; so far this afternoon, $1,075 has held. It's only been for a couple of hours, but that price as support means something: it's at the old late-December and late-January interday lows.

As morning has turned into afternoon, the split of the daily gain by Kitco's Gold Index has moved towards the greenback. As of 1:31 PM, when spot gold was at $1,075.40, the $14.00 gain was allocated to $8.80 due to weakening of the U.S. dollar and only $5.20 due to predominant buying.

The rest of the afternoon will show if the $1,075 level holds. If it does, then some chartists might have a re-think.

Update 2: Although it was close, $1,075 did hold. Gold spent the rest of the afternoon in a trading range centered around the $1,076 level, pulling up slightly near the end of regular trading to close at $1,077.60. The day's gain of $16.20 was split by the Kitco Gold Index into $9.40 for U.S. dollar weakness and $6.80 for predominant buying.

The U.S. Dollar Index didn't get back above 80 for the rest of the regular day. The upwards creep, which paused right around 1:30 PM ET, continued until 2:55 PM ET with the Index at 89.875. The greenback then drifted downwards, settling the Index into the 79.75-79.8 range where it ended regular trading. As of 5:30 PM ET, it was at 79.75.

The daily gold chart, from, shows how $1,060 has become a support level these last few days:

The series to watch, I suggest, is the relative-strength index (RSI) at the top. Through the decline since Dec. 3rd, it's been bottoming at slightly lower levels; it's also been topping out at significantly lower levels since mid-January. Currently, the gold price is recovering and the RSI is rising. What to watch for is if it tops out at well above 50, or higher than the last top. With the exception of the busted early-mid January rise, 50 is where the peaks have been. If 50 is soundly bested, then fears of another serious decline seem to be overdone...unless another curve ball comes. I should add that a Fed Funds rate hike is already widely anticipated and perhaps discounted. The most likely bolts from the blue are further trouble in Euroland or more assertive tightening by the People's Bank of China. A drop in the Chinese inflation rate may do it too.

The daily chart of the U.S. Dollar Index shows today's slump as a long-due correction...

...of a bull trend that's still rolling as of now. The Index is no longer oversold, but its RSI line still shows a bottom that typically occur in bull runs: around 50 or so. That was about the bottom level for gold when it was on a tear late last year. There's little sign of a serious reversal in the greenback as of now.

Next, two more charts that tie in to this weekend post made last Sunday afternoon. They're the five-day SPDR Gold Shares Trust (GLD) chart and the Amex Gold Bugs Index (HUI) chart, as from Yahoo! Finance:

Last Sunday, I noted that both charts had a gap in them; I treated them as "common gaps," ones that would be filled. As of today, as the latter chart shows, the Thursday gap in the HUI chart has been filled. The GLD gap has not as of yet.

The Gold:GLD ratio, as charted over at, sunk back today but is still close at a slightly-above-average value of 10.23. It's been two days since the ratio fell below 10, for the second time in a trading week. The ratio is the price of an ounce of gold (nearest futures) divided by the price of a share of GLD. Since 10 shares of GLD represent one ounce of gold, a value of less than 10 for the ratio indicates that physical gold has sold at a discount to its paper equivalent.

A Reuters report on today's trading, arranged in bullet-list form, made these points among others:
* Gold boosted by dollar drop, oil rally, global equities gains amid talk of help for debt-burdened Greece.

* Euro on track for best one-day gain since November on news of euro zone countries to help Greece....

* ETF Securities Ltd's plan to start a precious metals basket trust lifts investment demand.

* Gold's holding support on Friday, and subsequent stability suggest that downward correction could be over - CitiFX.

At this point, it's hard to say what's going to happen. As it turned out, the recent record long non-commercial position in the dollar/euro contract did serve as a contrary indicator, or as a gauge of oversoldness. You place our bets and you take your chances; the bet of a Euroland answer to the Lehman collapse hasn't panned out as of now. Gold has benefitted as the U.S. dollar has pulled back.

But, the metal has only risen back up to its bottom from before the Euromess started. The greenback still shows strength, and there's no event in the pipe that would reverse that strength. The only possible exception would be a strenghtening of the recovery, with a return to risk appetite accompanying evaporating fears of deflation. This event is more of a long pull, and its effect on the greenback is uncertain. Imports will rise with rising U.S. prosperity, pushing down the U.S. dollar, and there will be less foreign demand for U.S. Treasury securities. On the other hand, demand for U.S. risk assets - and, consequently, the U.S. dollar itself - may well go up enough to compensate.

The only unambiguous benefit for gold in a recovery would be the erasure of the "deflation discount" and a spreading of future-inflation expectations. That may well happen, but it lacks the kind of bull-power that the gold market would groove to.

And, it might be offest by a drop in Chinese inflation as their economy cools.

All told, the performance of gold today was encouraging but not very inspiring. There's not much sign that the slog is done with.

Bullish Rebuttal At Seeking Alpha

It's by Jordan Roy-Byrne, and it's entitled "A Stern Reality Check for Gold Naysayers." He begins by debunking the claim that gold's in an all-out bubble by showing that mainstream allocations to gold are quite small today when compared to two climaxes in 1934 and 1980. Also, he points to public-opinion figures that show less public bullish sentiment now than in 2006 and 2008.

In the latter part, he offers the opinion that gold is on the crest of a parabolic rise:

In the 1970s, gold began to go parabolic in the middle of 1979, almost 10 years into the bull market. The important breakout occurred in 1978, and then corrected 20% back just below the breakout point...

This time around, the important breakout occurred at the end of 2007 and then in 2008 we had the snapback to support, though the snapback was a large 34%. Note that in the last bull market the process of breakout, snapback and parabolic move took a year to develop, while this time it is taking about two years. That means this parabolic move will last longer....

Take a look again at the gold chart [included in the original article] and you will notice that the parabolic move has already begun. The recognition phase likely will take some time to develop. While gold could move to $1300 in the spring, we don’t expect sustained new highs until later this year.

His opinion in the matter isn't very far removed from my own, I should add.

A Contrary Opinion From Forbes Online

Contrary to Forbes' usual editorial policy, that is. Before featuring five hard-asset plays from various gurus, two of which are senior gold producers, author John Dobosz has this to say about the greenback:
For most of the past decade, and particularly since 2002, the value of the U.S. dollar has been trending lower against major world currencies, and against gold and baskets of many commodities. Even though the dollar has experienced a respectable rally since late last November, its bounce has not changed the long-term downtrend.

Dollar bears argue that low interest rates and an inflationary impulse in Fed policy spell continued weakness in the dollar--if not against other currencies, surely against gold and other commodities. Real estate, despite the horrific crash that precipitated the financial crisis, could also be a place to seek shelter from a tumbling buck....
The rest of the article - the picks and the rationales behind them - is here.

Mixed Signals From Commerzbank

The technical-analysis department has given one signal, and the commodities department has sent out another one. This pair of Business Week Online articles have both:

"Gold May Drop to $1,025, Commerzbank Says: Technical Analysis"

"Gold May Advance as Prices Near Three-Month Low Lure Investors."

It's not uncommon to see technical and fundamental analysts recommend opposite sides of the trade, but it is unusual to see the same institution issuing opposite-direction calls on the same day. Commerzback employees can brag about the independence of its analytical departments from each other, at least the departments located in different countries. The former call comes from the London office, while the latter comes from the Frankfurt office.

For the record, the technical-analysis bear case centers around a busted uptrend and '“considerable resistance”' at the $1,074 level. The fundamental-analyst bull case rests on bargain-hunting. Either way, the bases are covered unless gold stays stuck in a trading range.

Gold Begins An Honest Recovery

Trading didn't go that well for gold once the evening session began, but the opening dip to the $1,060 level proved only to be a spike. The rest of the night (ET), gold slowly rose above the $1,065 level and managed to get all the way up to $1,073 by 2:40 AM ET before pulling back. The pullback, lasting until it faded away as of 7 AM, took gold back down to the $1,065 level. The metal then jumped up, going well beyond its earlier morning high to peak at $1,080.10 before pulling back again,. As of 7:55 AM ET, spot gold was at $1,075.60 for a gain of $14.20 on the day. The Kitco Gold Index split the gain into $7.60 due to predominant buying and $6.60 due to the weakening U.S. dollar.

Weaken, the greenback did last night. The daily high of 80.45, reached at the end of regular trading yesterday, prefaced a decline that started hesitantly but grew faster as night turned into morning. It didn't stop until the U.S. Dollar Index reached 79.99 just before 2:40 AM. A secondary uptrend got rolling shortly afterwards, which ended pulling the Index up to 80.25 by 6:55 AM in the second of two stages. The decline then resumed, swiftly, pulling the Index to slightly below the 80 level. The last stage of the decline kicked in between 7:35 and 7:40 AM, pulling the Index down to 80.07 to 79.975 in that time period. As of 8:05 AM ET, the greenback was marking time slightly below 80.

A Bloomberg report, webbed by Business Week, attributed gold's strength and the greenback's weakness to an easing of the Eurocrisis, as it looks like the Grecian mess will be contained. All of the optimistic quotes therein were hedged, like these ones:
“With European woes easing somewhat, the dollar is retreating and demand for investment assets including gold is coming back,” said Hwang Il Doo, a senior trader with KEB Futures Co. in Seoul. “There are some investors seeking bargains, but the strength in gold appears temporary for now.”...

“We expect gold to stabilize due to current buying interest,” Eugen Weinberg, head of commodity research with Commerzbank AG in Frankfurt, wrote in a note to clients. “The firm dollar is likely to prevent gold from rising sharply.”
The article also contains an intriguing item: China Investment Corp., a PRC sovereign wealth fund, now owns 1.45 million shares of SPDR Gold Trust (GLD). Those shares represent 145,000 oz. of gold and are worth more than $155 million. They represent a small fraction of approximately $10 billion worth of commodity-related assets in the fund, according to its 13-F filing posted last Friday. The date of acquisition wasn't mentioned. GLD holdings were unchanged yesterday after rising slightly last Friday.

A Reuters report has a different take on gold's rise, contained in its first quote from an expert:

Afshin Nabavi, head of trading at MKS Finance in Geneva, said the euro's recovery was an excuse for buyers to get back into the market.

"After Friday's free-fall, markets have been consolidating yesterday and so far today within a range of $1,050-$1,075," he said. "Physical demand is still high out of Far East and India, so (there is) good support in the market."
Whatever the causal chain, trouble in Eurozone has been bad news for gold; a resolution of that trouble should push the metal up.

This six-month chart of the Kitco Gold Index, and of gold's spot price, shows a certain symmetry as of two weeks ago and most of last week:

Six months ago, the three-stage run-up that ended early December was just getting started. On the chart just above, which scales the KGI (blue line) to gold (red line) so that they began at the same point, raw gold outpaced the KGI; subsequent to December 3rd, the differential narrowed over time. As of the beginning of this month, it had been erased competely. Since then, as gold plummeted further, the KGI line has risen above the gold line. Graphically, it shows there's a certain leverage provided by the U.S. dollar - either way. The blue line shows that gold's moving in a channel if the greenback is factored out.

As regular trading proceeds, the U.S. Dollar Index is holding the 80 level after a further slight dip below it: as of 8:55 AM, the Index was at 80.01. Spot gold has sunk back somewhat, to $1,073.00 as of that same time. Again, the day's gain is split roughly evenly between U.S. dollar weakness and predominant buying. All in all, the overnight session was good given what gold's done in the last three trading sessions.

Monday, February 8, 2010

The Pause That Refreshed, And Later Dwindled

It's been one of those days where the morning slamdown was limited. After being pushed more than eight ounces after NYMEX trading opened, gold stood pat until 10:30 AM ET. Another dip at 9:10 took the metal down only a few dollars an ounce and was quickly recovered from. Between 8:45 and 10:40, gold stayed in a range bordered by $1,061 on the downside and about $1,065 on the upside.

Then, prompted by a fall in the U.S. Dollar Index to slightly below 80.10, gold rose to above $1,070. As of 11:34 AM, the metal was at $1,067.50 after breaking slightly above $1,070. The Kitco Gold Index attributed gold's $2.50 gain to $0.90 due to the weakening U.S. dollar and $1.60 due to predominant buying.

Speaking of the greenback, its recent top of 80.5 has accompanied some disturbing news from Bloomberg about net long future positions in dollar-Euro:

Futures traders increased bets to a record level that the euro will decline against the U.S. dollar on concern budget deficits in Greece and other European nations will hamper the region’s economic growth.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro [with respect to the dollar] compared with those on a gain, the net position, was 43,741 on on Feb. 2, compared with 39,539 a week earlier, figures from the Washington-based Commodity Futures Trading Commission show....
This jump-up is reminiscent of speculative longs in gold as of late November. It should set off alarm bells in a contrarian's mind.

As of this morning, the greenback has pulled back from that high. After a downward drift that started at about 9:50, the Index went from about 80.37 to the above-mentioned 80.1. As of 11:31 AM ET, it's recovered somewhat to reach 80.17.

Not much may happen today in the gold market, but the Bloomberg-reported long overhang indicates that the next shoe to drop is a U.S. dollar pullback...

Update: Any such pullback didn't happened. The U.S. Dollar Index climbed, moving up to 80.27 in a staggered rise between noon and 1:16 PM ET. Over the next twenty-five minutes, it was marking time.

Gold gave up its day's gains after reaching above $1,071 at almost 11:15 AM. Driven down in part by the greenback's recovery, the metal fell to a little below $1,065 but that level ended up holding. A slight recovery ended with the $1,065 level being tested again. It held a second time, but foundered on the third test: at about 1:15 PM, the metal's price slid below that level.

As of 1:37 PM ET, gold's at $1,063.90 for a loss of $1.10. Seventy cents of that loss was attributed to strength in the U.S. dollar by the Kitco Gold Index.

Update 2: As it turned out, the U.S. Dollar Index kept moving upwards. The shoe I've been expecting to drop, hasn't.

Instead, the Index climbed from 2:30 PM ET to 5:25 PM, going from about 80.22 to just below 80.45 in that timeframe. Since that time, it's been in range bounded by 80.42 and 80.45. The marking-time mentioned in the last update did lead to a secondary decline, but that decline only took the Index down a tenth of a point. As this chart shows, the greenback bull is still alive with barely a flinch. It's still in oversold territory, as indicated by the RSI series at the top of the chart:

That rise, of course, dragged down gold; the metal failed to hold the $1,065 level. After sinking below it right around 1:15, as mentioned above, gold recovered to that price and stayed around it until a little after 2:30 PM. Then, the metal slid downwards once again in a drop that leveled off near the end of regular trading. At the end, gold was at $1,061.40 for a drop of $3.60. The Kitco Gold Index attributed all but 50 cents of the decline to the rising U.S. dollar. The daily chart of gold, which has a slight discrepancy from the Kitco value due to it using the nearest futures contract, presents a short-term picture that still looks bleak but with $1,060-level support holding:

The metal's still stuck in the low end of the RSI channel graphed at the top, although it has not fallen to the undersold point of 30. The 200-day moving average (red line) is still rising to meet the current price. As has been the case in recent times, the U.S. dollar wil determine whether the $1,060 level holds or whether it'll be broken.

Gold bears are getting bolder, or at least are getting more press. This article webbed by, entitled "Gold Prices Headed to $820 an Ounce?", has Alix Steel giving an overview of the bear case after laying out the basics of gold and what makes it move. There are links to both bull and bear cases on the front page. An accompanying poll shows a lot of bullish sentiment long-term, though.

The Gold:GLD ratio, or the price of gold divided by the price of a share of the SPDR Gold Trust (GLD), was up today after sinking below 10 on Friday. As compared with rebounds of this sort in the last six months, as shown by a ratio chart, the value rebounded much more sharply than has been the case for a next-day snapback. As of market close today, one ounce of gold was valued at 10.22 shares of GLD.

Today did turn out to be a day of little action, but the drift was to the downside this afternoon. Gold's still hanging above support, but the U.S. dollar making new highs would drive it down back to sub-$1,060, and perhaps sub-$1,050, levels. The Eurozone crisis has subsided for now, but a lot of eyes are on Spain. I think the record position in non-commercial longs for the Index are positioned in the hopes that there'll be a Lehman-like event in either that country or Portugal. So far, there's been no sign of any contagion developing.

Interview With A Gold Bear

The bear is Brian Nick with Barclay's Asset Management, and his main reason is there's no inflation on the horizon. Only gold has priced in inflation: bonds, including inflation-protected TIPS, haven't. He think the analogy of today's near-zero interest rates being like 2003-4's too-low rates is a false one; if anything, because of high unemployment and the output gap, a zero-rate policy without additional quantiative easing is restrictive. He believes that gold will break its nine-year winning streak this year, and that a reasonable price is about $700/oz given current conditions. In his words:
[Interviewer]: Is gold's long-term average of $700-800/oz a fair value for the metal?

Nick: Yes. In fact, if the Fed is a little more restrictive than normal - which we think it is - it should actually be a little below that number. But as we see interest rates start to normalize, and the economy start to improve, I think that's going to work itself out. So a return to an equilibrium price somewhere in that range is what we expect. We don't necessarily have a target date or time horizon, but we think gold will trend lower overall.

He fits the profile of an old-pro skeptic that sees a nascent bubble. His historical ratio is one familiar to gold-market watchers: the ratio between gold investment demand versus demand for other reasons. It did get seriously out of whack last year, with investment demand rocketing up well above norms; Nick sees this as a bad sign. In his own words:
The gold market has really changed, as far as the makeup in where demand is coming from. One of the reasons why I think you've seen such a sharp, dramatic run-up is that it's become a lot easier for the mom-and-pop investors to invest in gold. There are ETFs now, like GLD (GLD), that you can buy through your online trading account that hold gold directly in the fund, and you don't have to find a way to store the physical. So it's a lot easier to buy and sell, and it's a much more liquid market than it was.

As a result of that, and as a result of the recession we just came out of, investment demand has really swamped demand coming from end-users of gold, whether they're jewelry makers or industrial users. We've really seen investment demand take over the market.

That worries us, because as quickly as that demand ramped up, it could also unwind. And so you have the potential for so much gold coming on to the market, as people are selling out of their positions, but there's very little demand to soak up the supply. So we think, if the correction starts to happen, it could happen very quickly, because there's close to a decade worth of industrial demand already sitting out there in the gold market. There's no way end-users of gold can absorb all the supply out there without taking much lower prices for it.

Unlike the MSM-grounded skeptic or the outside observer who usually has little time for gold, Nick is an expert on the market. His analysis is rooted in supply-and-demand considerations normally used in the commodity markets, and his demand analysis for gold is based upon the old standard of future inflation. He fits the bill of a market professional who finds the price of an asset wildly above what it should be based upon historical norms, which is a condition that accompanies a nascent bubble.

If the gold bubble goes from nascent to full-bloom, he's the inside fellow who's going to be confounded. It's quite unorthodox to believe that rising investment demand is bullish for the metal, except in the near term. If he winds up being wrong, especially if embarrasingly so, then the nascent bubble is ready to roll.


Speaking of unorthodox, Jeff Neilson fits the bill; he's one of those goldbugs who believes that the gold market is held back by price-suppression schemes. He argues that shrinkage in gold ETF holdings may be good for gold if the proceeds are used to buy physical bullion instead. He also claims that gold ETF holdings are double-counted in inventory reports, so a shrinking in those holdings leads to an overall reported-supply drop. If reported supply drops, then the fundamanetal picture for gold looks better provided that demand is unchanged.