Friday, February 19, 2010

Post-Hike Hangover Not That Bad

In fact, it's been pretty good. After regular trading opened, gold fell five dollars an ounce to a litle above $1,107 but it reversed course for a brief period. That reversal, which was followed by a drop to just below $1,107, proved to be a portent. Aftter that second dip, which ended at about 8:45 AM ET, gold climbed in a choppy fashion all the way up to $1,116. That level, reached at 9:45, made for a short-term top; in the next thirty-five minutes, gold dropped six dollars an ounce. That $1,110 bottom, though, marked the start of a rally that took the metal all the way up to $1,118.20. As of 11:56, there had been a small pullback; spot gold was at $1,116.30

The earlier decline was prompted in part by a resurgence in the U.S. Dollar Index, which traded choppily in a range until an advance got rolling as of 9:42. That move carried the Index from just above 81 to just above 81.2 by 10:19. In that time, gold shed the above-mentioned six dollars an ounce. Subsequent to its peak, the Index slid down to just below 81 in the next hour. Since the end of that drop, it was creeping upwards in a relatively narrow range that coalesced between 81 and 81.03. That range was bent as of 11:50 AM ET and was broken on the downside; as of 11:58, the Index was at 80.97.

The Kitco Gold Index had gold's overall gain of $8.20 split into a drop of $1.10 due to U.S. dollar strength and a gain of $9.30 due to predominant buying. What's remarkable about gold's performance is that yesterday afternoon-evening's panic drop is well on its way to being shaken off. Perhaps that's because people realized that the Fed's discount-rate hike wasn't a real tightening.

The rest of the day's trading may see gold go all the way to the near-$1,125 level it was at before the announcement. Whether that pans out or not, the gold market has been resilient.

Update: Things wound up moving faster than I had expected. At about the time of the original post, as luck would have it, the U.S. Dollar Index went into a waterfall decline and gold shot up. The $1,125 level was not only met but also exceeded, as of just before 12:30 PM ET.

Gold traced out a double bottom at about $1,116 as of 11:50 AM ET. Subsequently, the metal went for a run that carried it up to the $1,122 level. After reaching it at about 12:12 PM, gold pulled back about four dollars an ounce and then headed higher. After 12:30, the metal entered into a range between $1,122 and $1,125. That's good enough to say that the Fed-induced panic decline has been erased. As of 1:18 PM ET, gold made a triple top that also looks like a very small inverse head and shoulders. As it turned out, the bearish triple top prevailed in the immediate term.

That range break I mentioned in the original post turned into quite the drop. It took only six minutes for the U.S. Dollar Index to go from the 81 level to 80.78. Two attempts to rally back only made it just above 80.86; as of 12:25 PM, the Index had slumped even lower at the 80.75 level. A third attempt to break above 80.86 was made, cresting at 80.875 as of 12:44. Subsequently, the decline resumed; as of 1:31 PM ET, the Index was at 80.72 after rebounding from the 80.65 level. Just as gold recovered, so it was that the Index gave up its gains. In the near term, gold isn't mirroring the greenback because the former got somewhat ahead of the latter.

As of 1:24 PM ET, gold dipped a little below the range as the greenback recovered somewhat; the spot price was $1,120.60. The Kitco Gold index had the $12.20 gain on the day partitioned into $2.90 due to U.S. dollar weakness and $9.30 due to predominant buying. Of note is the fact that gold went back to where it was before the Fed announcement, but the U.S. Dollar Index hasn't. Thirty more basis point would have to be lost for it to do so.

Update 2: The U.S. Dollar Index didn't quite make it down to its pre-Fed-announcement level, but it came close. Despite the continuance of its drop, gold fell slightly in the rest of the afternoon. As things turned out, gold did get ahead of itself with respect to the greenback.

The metal's high of the day was reached through the above-mentioned triple top, made between just before 12:30 PM ET and just after 1:00. The floor of a brief range established at the same time, at $1,122, was broken as of 1:25 PM and was never regained throughout the rest of the session. A pause at the $1,120 level held until about 1:50; after which, another range developed with $1,120 now serving as the ceiling and $1,118 the floor. Just before 3:00, a short spike up to $1,122 took place; it was prompted by a fall in the greenback slightly earlier. That spike-up didn't last, and $1,120 became the ceiling again as the range was re-established. 3:50 saw a break in the floor, leading to a downwards spike that stopped at the $1,115 level. The rebound was only partial, though, and led to a third downstep in the ranges: this time, $1,118 was the ceiling and $1,116 was the floor. At the time of the 3:50 spike, the U.S. Dollar Index attempted a rally that later broke down. That breakdown, though, didn't give any push to the gold market as the close approached. At the end of the week, spot gold closed at $1,117.10 for a gain of $9.00 on the day. Last week's close was $1092.40, so gold ended up with a week's gain of $24.70, or 2.26%.

As noted above, the U.S. Dollar Index continued to decline for the rest of the afternoon session. The first wave ended as of 1:50 PM and saw the Index reach 80.605. A secondary uptrend lasted twenty minutes and took the Index up above 80.7. That point marked the second wave of the decline, which climaxed with a drop that ended as of 2:55 PM and took the Index to 80.57. A trading range then developed, which was tested on the downside at about 3:20 and was bested - briefly - on the upside between 3:50 and 4:00. The third wave carried the Index down from 80.665 to 80.515 in the space of twenty minutes. Another rolling secondary uptrend pushed the Index lower yet again. As of 5 PM, it ended the week at 80.52. Last week's close was at 80.24, so the Index gained 0.28 over what proved to be one of its wilder weeks.

The Kitco Gold Index divided the 9.00 gain into $5.50 for the weakening U.S. dollar and $3.50 for predominant buying. During the interday period, the Kitco Gold Index (KGX), which prices gold in terms of the same basket of currencies that make up the U.S. Dollar Index, reached about 908 right before 1 PM, and may have set a record. This one-year chart of the KGX as plotted with gold shows record high values for both at the beginning of December:

The high was reached on December 3rd for both gold and the KGX; the latter's was between 905 and 910. Unless the Dec. 3rd interday was definitely higher, today's interday result is in contention for a new record high. Had the U.S. dollar not shown the strength it has over the last two-and-a-half months, and stayed pat at its Dec. 3rd level or continued downwards, gold itself would almost certainly be at a new record high. That being said, the KGX closed at slightly above 900; on a daily-close basis, the record was not broken. But, it's near - and the channel it's been in from mid-December to last Monday was definitely broken on the upside.

Turning to the chart for gold itself, supplied by as usual, this week's action doesn't look very impressive from a six-month's standpoint:

Except for Monday's jump, this week's candlesticks show a trading range with the $1,120 level proving to have real resistance to further increases. Both of the indicators - the RSI on top and MACD on bottom - show a fairly strong technical picture: the former's at levels last seen in mid-January, and the latter is solidly in a bull pattern. The only trouble being, gold itself hasn't performed all that well despite the improving technical picture. As indicated above, this laggishness is due to strength in the U.S. dollar. Its source, however, doesn't change the performance. The current chart pattern resembles a reverse head-and-shoulders more and more, but gold has to pull back on more than an interday basis in order to form a proper one. Last Wednesday and Thursday saw two news items that threw gold for a loop: the IMF market-sale announcment and the Fed's discount-rate hike. Both were shrugged off.

I have to say that the technical position of gold is pretty murky right now. If the metal got and stayed above the $1,120-25 resistance band, it would be in for a nice run. There's one spoiler, though: the still-present and far more unambiguous strength of tht U.S. Dollar Index. This chart shows it:

Like gold's the Index's MACD lines are in a bullish arrangement. Unlike gold's, the lines are very close to crossing towards the bear side. They haven't yet, and today's action makes it unlikely that they will unless something unanticipatedly awful happens to the greenback on Monday. Note that the 50-day moving average, graphed in blue in the middle field, has risen above the 200-day average (graphed in red.) It'd be hard to find a technical analyst who would argue that the crossover was not a bullish sign for the greenback. Surprisingly, the RSI at the top has not moved into oversold territory. Note that when the Index stops falling, the RSI is still in pretty high territory. That shows the stamp of a bull market. Also note that playing the MACD cross on the bull side would have led to a huge gain, while doing the same on the bear side wouldn't have been all that profitable.

All of these factors say that the U.S. dollar will keep rising enough to play hob with the net-export section of this quarter's U.S. GDP. They also say that any reversal of the trend would be of a black-swan character. The only real hope for gold bulls (and/or dollar bears) is that the strong two-and-half month uptrend has been caused by the greenback carry trade unwinding. That unwinding is like short covering: it has to end sometime. So far, the rally has taken the Index about half-way between the November 25th low and the March 3rd high. The next serious resistance is found at the 82 level - and I had to dig that level up by going back to May. There's still the question of the long-dollar trade being hugely popular amongst speculators, but those speculators that hung on have seen a nice profit. The only immediate hope for a reversal of the rally rests on contrarianism, which does tend to be too early when the old "irrational exuberance" slips in. The only potential hope is for a black-swan event that wouyld knock down the greenback (and likely re-establish the carry trade.) The only anticipable one I can think of would be a Fed-orchestrated devaluation to goose the GDP number a little. That possibility seems unlikely before the first quarter's number is released...and it's unlikely period if the Fed would rather scotch the carry trade. Fed economists may have concluded that the yen carry trade exacerbated the Lost Decades because it was a drain of economic-recovery prospects.

Again, the picture is murky. It's no secret that gold hasn't done that badly in raw terms; in Euro terms, it's done well indeed. Gold now has rebound power when upsetting news is disseminated. There is, however, the headwind that is the U.S. dollar still exerting its influence. Right now, gold is in a race between global inflation and a U.S.-net-export catastrophe.

Thanks for stopping by, and the best for the weekend. This week, as with the last, there are reasons to be sanguine. Might as well enjoy them along with the weekend.

Thirteen Year Schematic

As published at Market Oracle, David Banister's thirteen-year bull-market hypothesis shows a good understanding of how bull market grow:
The first five years from 2001-2006 was the “stealth bull” in Gold and Gold stocks. The average Gold Fund ran up 30% a year for five years compounded. By the time investors figure this out, they all pile in right near a five year peak. The market then chops for three years sideways in an up and down fashion, getting nowhere. Investors get bored, and then we move into the final five year stage where awareness takes hold and the bull cycle really takes off.
The final five-year stage is one where the previously-vocal bears get worn down into silence, and formerly skittish bulls turn full-throated and impervious to declines. He thinks that we're in the beginning of the third stage, where skepticism and skittishness still prevail. The disappointments in the second stage add to bulls' frustration.

Interestingly, he compares the present bull market to tech's from 1986 [the year of Microsoft's IPO] to 1999. If he's right on the timeline as well as the third-stage pegging, then exploration stocks will be as wild in 2013-14 as Internet stocks were in 1998-99.

This year corresponds to 1995; last year corresponds to 1994. There was a tech mini-bubble in '95 and '96 as a few early-Internet IPOs caught fire; Yahoo! went public in April of '96. This mini-bubble did deflate somewhat in '97 before coming on stronger in '98. [You'd have to be either tech-market trivia lover or have a very long old-hand's memory to recall Spyglass, the company behind Mosaic.]

The gold market, however, moves to its own beat. The above schematic shouldn't be taken that literally.

Award-Winning Gold Fund Manager Explains His Angle

Kevin MacLean's Select Precious Metals Growth Fund has won the Lipper (Precious Metal) Fund of the Year award ranking, thanks to its three- and five-year performance metrics. His angle is to invest in smaller gold companies, avoiding the senior producers because they have no growth potential in a flat gold market. Even if gold's going nowhere, though, juniors have growth potential if they can expand their reserves and/or bring new production online.

The first question of this interview webbed by the Globe and Mail contains words that gold-stock speculators should pay attention to:
Why are you so cautious during mine construction?

It may take two to 21/2 years to build a mine. Six months before it is complete, I try to get on a plane and fly down to the property. I'll have a look and see that things are hopefully going well – that there is money left to finish the construction, nobody is picketing the project, there are no environmental issues, the government is not trying to impose new taxes or royalties, etc. If everything looks to be as advertised, I can start buying the stock because typically they would be discounted in the market at 15 per cent or more of future cash flows.
Another point made was that the sell-off which began on December 3rd was, in his opinion, triggered by Barrick closing its hedge book. Hedge funds basically sold on the news.

MacLean, of course, a gold bull. Noting that new supply is well below normal demand, and that demand is currently depressed, he believes that a resultant imbalance will push gold prices higher.

His stance could be criticized by people who note that demand is currently depressed because prices are so high and suggest that normal demand won't return until "normal" prices do, but the recent recession has had its influence too. Also, people holding off because of high prices eventually get used to them. This acclimatization process gibes with the spurt-and-pause nature of the long-term bull market. Except when exaggerated by the 2008 financial crisis, this pattern is how gold's moved up since the beginning of 2003.

His point about juniors adding value even in a flat gold market overlaps with a bit of lore from the exploration-stock world. [I got it in part from one of Casey Research's free E-letter publications, if memory serves me correctly.] Gold peaked in January of 1980, but several gold stocks didn't peak until the fall. Thanks to the underlying bull market, a lot of exploration efforts got rolling. A large majority of them came to naught, of course, but some minable deposits were brought onstream at about that time. It takes time to develop and build a mine; one encouraged by a huge bull market, and which has the underlying economics, is not going to be stopped by an end to the bull. There was at least one development-stage junior that saw a huge gain in 1981. [I note, however, that it was one of the lucky few. The economics of a project have to be right even at a much lower gold price for this kind of action to be expected.]

Here's a case in point, one whose timeframe is a little later: Hemlo Gold. Until it closed, the Golden Giant mine was one of Canada's biggest. The claims for it were staken in 1979, when the gold bull was reaching its climax. The drill hole that revealed a huge deposit was taken in 1981. Between then and 1985's first pour, the stocks of the two companies amalagamted to form Hemlo went from sub-dollar to above $10. That was due entirely to value creation, even though gold went from $300 to almost $500 from 1982 to 1987.

However - I reiterate - Hemlo was the luckiest of the lucky few. The trouble with selecting exploration stocks in a hot bull market is, gold fever makes even a marginal (or submarginal) deposit look like a sure money-maker. Many are chosen; few are destined.

Fed Discount Rate Hike Slams Down Gold, Which Stays Down

Yesterday afternoon's Fed announcement of a discount rate hike was called merely a credit-market normalization measure, but was interpreted by the market as a tightening measure. Gold fell almost twenty-five dollars an ounce between the time of the announcement and 7 PM ET, in three stages that spanned the end of regular trading and the beginning of evening trading. By the time the selling spree was over, the price of the metal was below $1,100. That support level held, though, as plummet turned into trading range. Gold settled into one after some post-plummet choppiness, trading around the $1,105 level for the last two hours of the night.

A slump ensued as yesterday turned into today, taking the metal down to the $1,110 level twice. The second try at breaking $1,100 was at about 2:30 AM, forty minutes after the first. Gold reached $1,099.40 as of the latter bottom, but took off after it was made. By 4 AM, the price was above $1,110.

Between 4 and 7:10 AM, the metal traced out a saucer-shaped formation as a pulback lost steam and was replaced by a renewed attempt at a rally. The $1,110 level was run at again and briefly surpassed around 7:20. As of 8:05 AM ET, spot gold was at $1,110.80 for a gain of $2.70 since yesterday's close. The Kitco Gold Index attributed $4.60 worth of change to predominant buying and -$1.90 worth due to strengthening of the greenback.

Speaking of it, the U.S. Dollar Index went for a wild ride last night that saw it make a new high not seen since last June. The drop in gold was wild, but the gain in the Index in the 4:30 to 7:00 PM timeframe was pretty extreme. From 80.39 as of 4:30, the Index shot up to 81 even within ten minutes and, after a pause, continued climbing steadily until reaching 81.36 between 6:50 and 6:55 PM. That's a gain of almost one full point in less than two-and-a-half hours.

From that time to about 7:10 AM, the Index traded raggedly in a wide trading range bordered by about 81.3 on the upside and 81.1 on the downside. Attempts to break through on the upside as of 1:25, 2:25 and 3:30 made for a triple top at the 80.33 level, but the Index failed to decisively break out of the range each time; by 4:20, it had fallen from slightly above the top end of the range to slightly below the lower end. That break downwards failed to get steam, and the Index lumbered back up to the 81.23 level by 6:40. The end of the range came on the downside, as of about 7:10 when the Index sunk to 91.075, got clogged at that level, failed to re-rally decsively above 80.1, and continued creeping down. As of 8:05 AM ET, the Index was at 81.06.

I note, in passing and once again, that the long end of the U.S. dollar trade has been really crowded as of late. The Fed hike news, although not what many dollar/euro longs were expecting, gave them a bonanza. The crowd (non-commercial longs) has been unexpectedly right on the trade, in a big way. This kind of success combined with prior popularity makes for enthusiasm.

As of 8:30, the Consumer Price index number was announced. The overall rate was a lower-than-expected 0.2%, and the core rate actually declined 0.1% annualized over the last month. Expectations for the core rate were for a gain of 0.1%. Despite yesterday's higher-than-expected PPI number, there's no evident inflation on the consumer-price horizon as of yet. The case for Fed tightening of the Fed Funds rate is weakening, making the Fed more likely to take the market reaction to yesterday's discount-rate hike as a sign that it's not yet time to tighten up.

Counterintuitively, the U.S. Dollar Index slumped after the number was announced; as of 8:34 AM, it got to below 81. That slump didn't last, and perhaps was caused by selling on the news. As of 8:41. the Index got up above 81.1 before pulling back somewhat.

After falling when regular trading opened, gold jumped up more than three dollars an ounce before backtracking; by 8:42 AM, the metal's price was at $1,106.90: lower than it was as of just before 8:30. Despite fillips in the opposite direction, and later indecisiveness, both the greenback and gold were trading in line with the CPI release twelve minutes after its release.

Moving back to last night's decline, a Reuters report webbed by the Globe and Mail says that European buying, fueled by concern over the continuing Eurocrisis, stopped the decline:
The metal was sharply lower in Asia but met buying interest in early European trade amid fears over instability in the currency markets. The euro is suffering from dollar strength and concern over the fiscal health of smaller euro zone economies.
Quoted later is an analyst who sees the decline being a portent if the Fed follows through:
“This near-term gold-bearish, as it reduces liquidity,” said HSBC analyst Jim Steel in a note. “Highly accommodative monetary policies have been an important element in the gold rally.”

He noted, however, the Fed's assertion that the change was not expected to lead to tighter financial conditions or lead to a change in the outlook for monetary policy.

“If this implies monetary policy will remain lax, then the sell-off may be brief,” he said.
An earlier Marketwatch report has an expert, perhaps after seeing the IMF sale annoucement turning into a non-event, pooh-poohing the fears that the recent recovery will turn into conditions more like those in the second week of February:
Gold's decline Friday in Asia is a "knee-jerk reaction" following the surprise rate move after New York markets closed, said Patrick Kerr, a managing director at Amerifutures Commodities & Options...

"Once the market digests this, maybe tomorrow morning N.Y. time or so, we could see a huge rally late in the day or early next week," he said.

"This is the so-called 'boogey-man' that was going to crush gold [but it's] still above $1,100," he said. "Now that folks see that a rate increase didn't demolish gold, the boogey man doesn't seem so scary anymore so it's full speed ahead."
The gold market did digest the IMF news well, but that might be because the players decided that the IMF announcement was a non-event as the IMF was scheduled to sell that amount of gold anyway. Speaking of the IMF sale, Afrol News has an item entitled "World Gold Council welcomes IMF gold sales." Aram Shishmanian, the Chief Executive Officer of the WGC, complimented the IMF for unloading the gold in an orderly and non-disruptive way.

It seems that the fears are dissipating more rapidly now, which makes sense in a way because the last two market-shaking items were shaken off. However, I note a certain blitheness appearing.

As it turned out, the U.S. Dollar Index met the CPI news with some see-sawing in a corkscrew pattern that was narrowing towards the 81.06-.07 level. Gold has actually rallied after see-sawing itself; the above-mentioned erasure of the initial post-8:30 gain proved to be the second half of a double bottom. As of 9:10 AM, the metal was at $1,113.60 on the spot market for a gain of $5.50. The Kitco Gold Index attributed a $1.25 drop due to U.S. dollar strength and credited $6.75 worth of rise due to predominant buying.

Perhaps that blitheness is justified after all.

Thursday, February 18, 2010

Gold: What IMF Sale?; Discount Rate Hike Takes Priority

For an event that was supposed to rock the gold market, the IMF sale has proven to be a one-hit wonder (so to speak.) An initial run-up at the start of regular trading was blocked, but the pull-down merely led to a pause. By 8:50 AM ET, gold was rising once again. A second pause kicked in as of 9:30 AM ET, but the resultant range was near the top of the forty-minute move: $1,115-$1,118. It stayed in that range for nearly an hour, before dipping slightly to $1,114. Then, the price rose again in a swift move that topped at $1,123.50 right at 11 AM. The release of the Index of Leading Indicators for January seems to have had an influence on the rally, even though the number was weaker than the expected 0.5%. It's more plausible that the better-than-expected Philly Fed Index number had an upward influence, as recovery foreshadows inflation.

Another pullback followed after 11, which took gold down below $1,118 before ending and revewrsing slightly. As of 11:25 AM ET, spot gold was at $1,117.20. The Kitco Gold Index divided up the daily gain of $12.50 into $10.90 due to predominant buying and a $0.50 loss due to U.S. dollar strength. At this level, it's almost as if the IMF announcement had never been made.

What weakness there was in the U.S. Dollar Index vanished by 11:18. After bottoming from an early morning decline at 80.17, the Index recovered some of its loss by pulling up to the 80.4 level as of 10:35. A quick double top presaged a mild pullback, ending at the 80.3 level as of 10:58, but the uptrend resumed. 80.45 was taken out, followed by a dip to 80.4 and a new mid-morning high. As of 11:27 AM ET, the Index was rolling at 80.57.

It's an odd combination given recent behaviors and gold's long-established habits: gold and the greenback rising more in tandem than in mirror image. The last time this happened, the incongruity was resolved to the detriment of gold. There's no sign of that happening for this tandem run, so far.

Update: The inconsistency was resolved in favor of the greenback, until recently, and gold was pushed down a little. From 11 AM to 12:15 PM, the metal's price slid down in a decelerating drop that ended just below $1,114. Since then, it's been in a trading range between the $1,114 and $1,116 levels. As of 1:18, spot gold's at $1,115.50 for a gain of $8.70 on the day. Kitco's Gold Index has the gain divvied up into $9.85 due to predominant buying and a $1.15 subtraction due to U.S. dollar strength.

The U.S. Dollar Index did wind up weakening after finishing its run at 80.7218 as of 12:10 PM. The entire run lasted for more than an hour and a quarter, carrying the Index more than 41 basis points upwards. Since that 12:10 top, it slid down in a two-step drop that carried it down to 80.5263 as of 1 PM ET. A double bottom was made five minutes later, prefacing an upwards reversal that topped out just below 80.6 as of 1:10 PM. As of 1:20 PM, the Index was at 80.57.

Although the USD INX did gain some ground back, there was a spell of weakness which gold didn't follow through upon by rising up. The most likely reason why is that the gold market got a little ahead of itself and didn't digest the strength in the greenback properly. The U.S. dollar may coontinue to fall from here. If gold doesn't play off against it, then it's likely that this morning's gains are being digested. The rest of the afternoon will tell.

Update 2: And another curveball was thrown at the gold market, which packed enough punch for another large drop. This one had about 1 1/2 times the impact of the announced IMF sale. The Federal Reserve, in its shift from deflation fears to normalization mode (or inflation worries), has hiked the discount rate to 0.75% from 0.50%.

This rate isn't the same as the Fed Funds rate; it's the rate at which banks are fronted money on loans they bring in as collateral.
"The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy," [the Fed said] said.
It's true that the normal discount-rate premium is about 1% above the Fed Funds rate, and today's hike raises that premium from 0.25-0.5% to 0.5-0.75%. The markets, however, have taken it as a tightening. Stock futures fell, and the announcement was good enough for a $15/oz drop in gold. The U.S. Dollar Index has benefitted hugely, exploding upwards from 80.39 to 81.00 in the space of less than ten minutes.

Evidently, the imminence of a rate hike - even one in the discount rate - has not been anticipated by the markets. It remains to be seen, though, how each market will react tomorrow. The Jan. 12th announcement of a reserve-ratio hike by the People's Bank of China was enough to completely derail a gold recovery at about thirty dollars an ounce above this afternoon's high; the second such announcement only affected the gold market interday. The same absorption rule may apply to this move and the Fed's next one.

Before the announcement, gold had reversed its late-morning decline and managed to climb up well above $1,120. That level was reached as of 2 PM ET, and gold spent an hour and twenty minutes bumping up against it until breaking through to $1,122 as of 3:25 PM. A period of indecision followed as gold bobbed around that level until the Fed announcement. After plummeting that $15 per ounce, a period of rest ensued and gold closed the day at $1,108.10. Surprisingly, there was still a small gain on the day: $1.30. The Kitco Gold Index credited the metal with $8.00 worth of rise due to predominant buying and debited $6.70 for the strengthening of the U.S. dollar.

Some perspective may be of help. As of 5:30 PM ET, the U.S. Dollar Index was at 80.93 for a record unmatched since last June. And yet, gold is well above the level which it was at when the Index last touched a multi-month high - Feb. 12th. Tht day, gold closed at $1,092.40.

A daily chart of the Index's moves could provide fodder for the "guess the surprise" game. As far as I can tell, there was no way to do so from today's closing chart (from, whose data ends before the Fed's announcement:

By my lights, there was no anticipatory move except for an underlying strength...despite the lopsidedness of non-commercial longs in the dollar/euro market. All the chart shows is a trading range, which could be chalked up to an expectation of (or a hope for) more trouble in Euroland. Those longs who weren't shaken out by the recent turbulence have reason to celebrate. As of 6:23 PM ET, the Index continued shooting up after a post-announcment pullback; it was at 81.18 at that time. I note that the widespread success in the dollar-long trade, despite the recent turbulence, will make the greenback-long the place to be for the nonce. That's what happens when the crowd is successful in speculating. The ones who bailed out in the last few days are almost certainly kicking themselves for being impatient (or undermargined.)

The interday action gave even less clue of what was coming. Before the Fed announcement, the Index was drifting downwards slightly, although basically in a trading range. It was in one from 2 PM to 6:20 PM, bordered by 80.47 on the upside and 80.37 on the downside. Just prior to the announcement, the Index had slipped to the bottom of the range and looked like it was going to penetrate on the downside. If the Fed were expecting to send a jolt to the system, the behavior of the greenback shows that it succeeded.

Gold, of course, was shocked too. This 1-year chart, also from, shows the effect of the discount-rate hike at the very end:

From the 1-year persective, this afternoon's spill looks little more than a continuation of a short-term holding pattern. The MACD indicator, found at bottom, is still bullish - but I note that the RSI line (at top) topped out just above the 50 level, where it has been wont to turn in the last two months. That being said, it's still above 50 even after the spill.

There are those who think that the Fed et al. are deliberately pushing down the price of gold. I'll credit them to this extent: it's a possibility that gold is being watched by Fed staff as a future-inflation gauge, and recent strength ex-greenback has been taken as a sign that it's time to worry about inflation. The People's Bank of China likely uses similar reasoning, although for a more direct motive given the PRC's desire to obtain more gold for reserves (at a low price, of course.)

Moving to more quotidian matters, the Gold:GLD Index, calculated by dividing the price of gold by the price of one GLD share, got below 10 interday. That level means that gold, at some point in the day, was trading at a discount to the SPDR Gold Trust's paper alternative. (Each share represents 1/10 oz of gold.) That drop, interday, makes for the third time this month that the indicator has flashed so. To the extent that it's an oversold indicator, it is signalling an oversold condition as it has on Feb. 1st and Feb. 7th. A chart of the ratio is here.

Moving back to the discount-rate hike, the timing of it may seem odd to some because consumer credit was still contracting for the 11th straight month as of December. [Data here.] After all, why tighten before consumer credit has turned up? Why be pre-emptive? Discount-window borrowings have been contracting too, so interpreting the hike as a disguised symbol for the banks to get out and lend isn't very plausible. Had the banks been using the discount window as a carry-trade device to buy U.S. Treasuries and short-circuit credit growth, it would have shown on the chart. All that appears is a huge amount borrowed during the financial crisis that's been gradually tailing off. There's no sign of discount-window hoggishness over the last year.

It could be that the Fed wants to hurry the process of getting discount-window borowings down, and is sending a message to its member banks to cut down further. A more likely explanantion is that recent economic data has convinced the Fed that the recession is truly over and recovery is here; hence, it's time to start normalizing. At any rate, that august institution managed a market-unexpected shift in policy - at least, in terms of timing. Once the excitement (and panic) subsides tomorrow, the extent to which gold has already discounted such a shift will be seen. The excitement in the greenback is likely to continue, even if a refreshment pullback ensues.

Unless another surprise is awaiting us...

Postscript: This doesn't count as a surpise, but the gold market has contiuned to take the Fed news badly. The price of the metal fell a further $6/oz shortly after evening trading opened. After a pause, gold fell further; it dropped below the $1,100 level at around 7 PM ET. As of 7:15, the metal is just above that level at $1,100.80. So far, $1,100 has held; as of 7:57 PM, gold climbed back up to $1,106.30 - almost at closing level. The greenback has had its influence on the metal.

More specifically, the U.S. dollar shot up just beforehand. As at 6:51 PM ET, the Index rocketed as high as 81.3597 before pulling back to the 81.2 level. A further post-7-PM drop put the Index well below 81.15, before it veered in on that level as things calm down.

Markets are made by people, of course, and this drop shows the evening traders getting their first crack at the metal and the greenback post-announcement. There may be other drops in gold as traders in different countries and time zones hear about the news and react to it too, but the bounce-back makes another attempt less likely as of now.

Postscript 2: At least two FOMC members (Fed governor Elizabeth Duke, Fed bank of Atlanta president Dennis Lockhart) have said publicly that the hike was not a tightening, even though the markets have been taking it as one. Given that reaction and the denials - normally, one person steps up to the plate - a hike in the Fed Funds rate itself isn't likely in the near term.

Bill Gross of Pimco has stated that he himself doesn't believe it's a tightening move or a signal of the imminence of one.

Seeking Alpha Article Predicts Gold Hype Will Return

Back in November, at least one article on gold per day was sure to hit the top 10 list and generate a lot of comments. Nowadays, one hardly shows up in the most-popular list at all and the number in the "Gold Price" theme has dropped by more than half. The interest in gold at Seeking Alpha has seriously dwindled. If it can be taken as representative of the investment community as a whole, interest in gold has all-but-withered outside of the usual haunts.

Richard Graham think the hype will return, though. He makes an important point regarding a coming Fed rate hike, noting that it implies that the Fed now sees inflation as a problem:
On a very mechanical level, this will appreciate the dollar and decrease the price of gold, which should provide a good buying opportunity. Raising the interest rate, however, is also a much larger signal. It signals that the Federal Reserve perceives inflation to be a real and imminent threat and that the Fed is willing to sacrifice turning off the money spigot and slow US economic growth.

...Raising interest rates will be the first salvo of attacks from the Fed and provide a very good indicator that inflation is picking up. These attacks, though, will be too little too late. Gold should enjoy a strong rally before the Federal Reserve finally gets inflation under control.
This is the first causal factor that will bring back gold hype, in his opinion.

The second is a default by, or bailout of, Greece. As would be the case with a rate hike, Graham believes it'll be short-term bearish but longer-term bullish.

I can't fault him on his logic about the rate hike, nor for him playing the Fed-underreaction odds. That's been the way to bet in previous cycles.

More Sentiment Indicators Signal Extreme Pessimism

One of the three sentiment indicators was profiled in an entry here yesterday, but Adam of "Before It's News" has gotten ahold of two others. The first is the 10-day moving average of the Daily Sentiment Index, and the last is the put-call ratio for the Market Vectors Gold Mining Index ETF (GDX.) Both show, or have recently shown, sentiment that's very bearish. Hence, Adam concludes, the gold market's likely to go up.

Given that gold's leapt up to a new daily high of $1,118.50 as of just before 9:30 AM ET, the timing was fortuitous...even if it was webbed before the IMF open-market-sale announcement. The fact that this bit of news was shrugged off, as well as the second phase of reserve-ratio tightening by the People's Bank of China earlier, augurs well for the metal. (So has the recent plummet of the U.S. Dollar Index, from about 80.65 as of an hour ago to 80.22 now.)

Pie Graph Of Worldwide Gold Production Shows Shift

Believe it or not, North American mines account for only 16.3% of total world gold production right now. Moreover, old-standard areas like South Africa, Australia, Canada, and (yes) the U.S. are declining over time.

The Business Insider has the chart of the former and a graph for the latter, along with some commentary. One main reason for the shift is that the emerging gold-producing areas have been relatively unexplored. Another is those areas are welcoming miners in rather than stifling them.
Gaia the Earth Goddess didn’t ask where we wanted our gold and silver deposited. And it is the underexplored – and in some cases the unexplored – regions that offer the most potential for new discoveries, greater production, and thus, higher investment returns.

There's little to argue with that conclusion, provided it's remembered that new and unexplored vistas call up gold fever as well as gold...

Another Burst Of Hope

This time, from technical analyst Daniel Bruno. His line of thought comes from a Bloomberg report:
...A climb to $1,419 an ounce would equate to a 150 percent projection of bullion’s rally from January 2009 to its record in December, according to a series of numbers known as the Fibonacci sequence.

Gold “remains robust above its rising trend line,” and the recent rebound from a three-month low on Feb. 5 is a “bullish” signal, Bruno said in an interview. “We project about $1,400 within 12 months as long as the $1,000 level holds,” he said.

It's a call that's far more daring now, as gold is at $1,100, than similar calls were when gold was at $1,200. Of course, as long as everyone remembers that at least one bullish analyst scored with a $1,200 prediction last year when gold was below $1,000, similarly optimistic calls for this year will be made.

IMF Sale Announcement Spooks Gold Market Somewhat

The hopes that the rest of the IMF gold would be snapped up by another central bank are fading as the Fund announced that it will try to sell the 191.3 tons left in its 400-ton sale allocation on the open market. It will sell to any central bank too, provided that any such bank asks before the gold is sold:

"We are still open to off-market sales, so that window has not closed," IMF Finance Director Andrew Tweedie said, adding: "All that has happened now is that we are moving to also start on-market sales."

Tweedie said a key element of the on-market sales was that they would be carefully phased over time. "This is the practice that other central banks have followed successfully, and we plan to adopt a similar approach," he added.
The slump was tied to the fact that the last rally was based on central bank buying of gold (to be more precise, emerging-market central bank buying) and the new overhang of supply, phased in as it may be.

Gold slumped a little before the announcement, but dropped about nine dollars an ounce right afterwards, and nine more as of about 7 PM ET; it bottomed a little more than an hour later at about $1,097. Shortly afterwards, though, the price vaulted back up above $1,100 and drifted between that level and $1,105 until about 3 AM. Another, shorter dive ensued at that time which took the metal down to $1,096.20. Again, the drop was short-lived; by 3:30, gold was up above $1,100 again. The metal trended upwards for the next two hours, reaching above $1,105 before pausing at that level until about 7:20. Then, it spurted up again. As of 8:02 AM ET, spot gold was at $1,106.20 for a drop of 60 cents on the day. Surprisingly, given last evening's news, the Kitco Gold Index has gold down 70 cents due to U.S. dollar strength and up 10 cents due to predominant buying. Given the momentousness of the news, the near-unchangedness is unexpected. There may be one or more tests for air pockets in the regular session today.

The U.S. Dollar Index, compared to yesterday, was rather sedate last night. After regular trading ended, the Index drifted down slightly until the IMF news hit. Surprisingly or no, the greenback moved up on the news: from the 80.45 level to the 80.63 level in less than fifteen minutes. After 7:45 PM, though, the Index traded in a range bounded by 80.55 to 80.65 until night had turned into morning (ET.) After slumping between 1 and 2 AM, the Index turned upwards and made a double top at the 80.71 level. It pulled back again, reaching 80.47 as of 5:25 AM, and then churned between 80.5 and 80.6. As of 8:14, it was at 80.58.

A lot of today's reports have gold tied in with the greenback. This standalone article from Reuters has two quotes from experts, the second of which has held up well so far:
"[Last night's drop] wasn't totally unexpected given what the IMF has been saying, but it was still enough to give the market a rattle," a gold dealer in Sydney said....

"This is probably a knee-jerk reaction. At the end of the day, the sales from the IMF are well-known," said Jacob Oubina, senior currency strategist for

A Marketwatch report, entitled "IMF announces gold sales, putting metal under pressure," has this reaction:
"While the IMF attempts to sell the gold in a phased manner over time, short-term gold supply is likely to rise and could, at least psychologically, weigh on the gold price," said analysts at Commerzbank AG in a note to clients.
After the opening of regular trading, that weight isn't evident so far. Despite the U.S. Dollar Index breaking slightly above its 80.55-80.65 range, before falling back, spot gold actually moved from a slight loss to a gain of $1.90 as of 8:58 AM ET. The 1.4% rise in wholesale prices was double the expected 0.7% figure; the core rate rose more than expected too. Another greater-than-expected figure was jobless claims, which were up by 31,000 when analysts expected a small drop. The release of both figures temporarily choked off an early-morning rally that got gold up to above $1,112. Dollar strength and gold weakness likely resulted from the second being seen as more significant than the first, or as the first signalling a rate hike sooner rather than later. So far, though, there hasn't been a serious test of the kind that's recently abated. If gold gets through the day without being hammered, then the technical position looks pretty good...

...unless the slam-down comes tomorrow.

Wednesday, February 17, 2010

Gold Price Dip Down On Resumed U.S. Dollar Strength

The greenback is still holding in its trading range between about 80 and about 80.5. As of about 9:15 AM ET, the U.S. Dollar Index ascended above 80; it continued inching up until about 10:30, when the rise accelerated. After pausing at the 80.22 level, the Index has kept moving up; as of 11:48 AM ET, it was at 80.33 after reaching as high as 80.395 as of five minutes previous.

Naturally, that rise has taken its toll on the gold price. After reaching above $1,125 at the beginning of regular trading, gold fell about seven dollars an ounce between 8:05 and 8:30. The better-than-expected housing starts news did mollify the decline, but it seems to have had a strengthening effect on the greenback. After ranging between $1,118 and $1,120 from 8:30 to 9:15, gold dipped another two dollars an ounce before rallying somewhat. That rally fizzled as of 9:50, as did another half and hour later that topped out at a lower $1,120. Since then, gold was trending downwards in counterpoint to the greenback's rise until it stopped below the $1,112 level. As of 11:49 AM ET, spot gold was at $1,113.40 for a drop of $3.90. The Kitco Gold Index had gold down $9.80 due to strengthening of the U.S. dollar, leaving a gain of $5.90 due to predominant buying.

As the Kitco Index shows, there's still hidden strength in the gold market. The price of the metal may continue to fall, but not by much. The $1,110 support level looks like it's going to hold up today.

Update: It has so far. After the original post, gold pulled up more than five dollars an ounce to reach just below $1,118 as of 12:20 PM ET. Then, it slid back to the $1,115 level just before 1 PM. Afterwards, the metal zipped up four dollars an ounce to reach $1,120. A double top was formed, with the tops being reached at about 1:12 and 1:22 PM. Subsequently, as of 2:05 PM, gold fell back to $1,114.60 for a loss of $2.90 on the day. The Kitco Gold Index has a $8.80 gain due to predominant buying pressure and a $11.70 loss due to the strength in the U.S. dollar; both add up to the $2.90 loss.

The greenback hasn't gained much since the last update, but it has gained. After falling back to the 80.25 level, reached at about 12:25 PM, it later recovered, reaching 80.415 by 12:55 PM. A pullback to the 80.3 level followed, with a recovery to a slightly higher level afterwards. As of 1:58 PM ET, the Index was at 80.41, but a leap-up all the way to 80.52 took place at 2:01 PM. That leap was partially erased a few minutes later.

Gold's still stuck in a holding pattern, but the greenback hasn't really pulled it down.

Update 2: Not until later in the afternoon, that is. As it turned out, strength in the U.S. dollar did create somewhat of an air pocket. The decline that started just before the last update continued until just before 2:30 PM ET when gold bounced off the $1,110 level. Then, followed a five-dollar bounceback that lasted until 3:40 PM. The price drifted back down again, slowly, until 4:30 PM; at that time, the price plummeted to about $1,106. A short uptick was followed by another decline that took the price down to $1,103.40. After that second drop, the price stabilized on a solider basis and spot gold closed regular trading at $1,106.80 for a loss of $11.00. The Kitco Gold Index still credited gold with a gain due to predominant buying, once U.S. dollar strength was factored out, but not by much. Instead of the multi-dollar figures above, the allocation due to predominant buying at the end of the day was $0.50. $11.50' worth of drop was attributed to U.S. dollar strength.

Perhaps the reason why gold did so well in the predominant-buying category, despite U.S. dollar strength, was because of an expectation that the U.S. Dollar Index would pull back later in the day. It didn't; the gains made since the last update not only held, but they also were extended a little. The Index jumped all the way to 80.53 around 2:05 PM, but pulled back in the next forty minutes. By 2:45, the Index was below 80.4. Then, a lumbering rise got underway which lasted until 4:35 PM; at about that time, the Index made a double top at the same level as the 2:05 window. Instead of a reversal, though, the Index pulled back slightly and churned in a trading range centered around 80.48 or so. As of 5:30 PM, it was at 80.47.

Despite that last-minute drop, gold's held up fairly well today. This chart shows a holding pattern:

The action over the last week, from a chart-scryer's perspective, contains some grist for optimism. Today's high managed to slightly beat Feb. 3rd's; on that day, gold topped at just below $1,125. This day's high, (which is of the nearest futures) was just below $1,128. The most recent low was Feb. 5th's $1,044, which was much lower than Januay 28th's low of $1,074. The pattern from January 20th to today resembles two-thirds of a reverse head-and-shoulders bottom.

Before continuing, I must say that there was a similar pattern from mid-December to early January, which was busted by the People's Bank of China's first reserve-requirement ratio increase on Jan. 12th. Even if this pattern completes according to the textbook, there's still the chance that the price will still be knocked back down by an untoward event.

If it follows the script, though, gold will decline again in the coming week or so but level off at well above $1,050. It doing so would fill the gap between yesterday's price action and that of the day before, establishing a common gap. Then, it would rally up to about $1,125, perhaps pause or backtrack a little at that level, and then rise solidly above $1,125. The rationale for such a pattern would be increased demand for gold, all over the world, as signs of global inflation become more evident. More specifically, demand quickened by the Eurocrisis would continue to kick in as Euroland inflation becomes more widely anticipated.

However, a sustainable rally depends upon a reversal in the two-month trend made by the U.S. dollar. As this other chart shows, there's no drop in evidence as yet:

Instead, there's a wide trading range that has held up - a very wide one of late; almost the entire span has been covered over the last two days. If there's any adjective that can be used to describe the U.S. dollar's action over the past two days, it would be "indecisive." There really isn't any near-term precedent for this kind of indecisiveness, but the last time two opposite-colored candlesticks stood side by side on the chart was on January 6th and 7th. The Index took off in the same direction indicated by the most-recent candlestick. In the case of today and yesterday, that direction would be "up."

The only demur I can think of to the above guess would be the crowdedness of the U.S. dollar trade. There are more than enough many non-commercial longs on the U.S. dollar side to make a contrarian wonder.

In making that guess, I may be too chart-happy with respect to gold; 'tis true. Next day's trading will bring a clearer picture in both markets, interlinked as they are.

TIPS Prices Sinking

At least, ten-year TIPS are. They've mostly pulled back from their 1.5% gain in January; at the rates that prevailed yesterday, they're indicating a 10-year inflation rate of 2.25% per annum. As of January 11th, the indication was for 2.49%.

The question is: are inflation expectations still too high, or the TIPS pullback taking place for other reasons? At that price, the yield's 1.46%. That can be seen as the expected real rate over the next ten years. An increase in demand for credit will push the real rate up.

However, it's the decreased differential that's sending the message; regular 10-year bonds have not been following in TIPS' wake. According to Kurt Brouwer, PIMCO sees the 2010 U.S. inflation at 1%. That rate makes TIPS a lousy deal compared to straight 10-year Treasuries.

The question remains, though: have TIPS pulled back because the inflation story is no longer viable, or did they simply get ahead of themselves last month?

Gold-Stock Sentiment Index At Unusual Low

Jeff Clark included a bit of self-promotion, but he does make the point that the sentiment indicator which highlights his article is at a low level. The Gold Miners' Percentage Bullish Index sunk below 20 earlier this month, from Feb. 4th to Feb. 8th, at the time when gold itself had plummeted below $1,050. That sub-20 level, the Index hasn't been at since December of 2008.

Since then, gold has risen quite a bit but the Bullish Index hasn't. As of yesterday, it was 22.58.

Naturally, Clark recommends buying gold stocks at this level.

(If you want to follow the Index yourself, has it charted here.)

Indian Gold Demand Still Soft

The price point is still $1,100/oz, according to this latest Reuters report:
"Today demand is down as prices have shot up," said a dealer with a private bullion dealing bank in Mumbai....

"People are playing the wait game, they want levels below $1,100," said another dealer with a state-run bullion dealing bank.
The report also notes, though, that the rupee is strengthening; that strength makes the recent rise less in rupees than in greenbacks.

This Indian gold expert expects gold to come down in the next couple of weeks, because he expects U.S. dollar strength to resume.

Case Study On The Hazards Of Exploration Stocks

It's webbed by Smart Money, and it originally comes from Barron's Online. It makes for a sobering report for gold-exploration speculators. Two exploration companies, NovaGold and Seabridge, have market caps of $1.12 billion and $948.19 million respectively. The stock price of each is $6.10 and $25.36 respectively. At these prices and market caps, one would expect them to be solid producers. And yet, neither has produced an ounce of gold.

The article, entitled "Is There Gold in Them Thar Hills?", explains why both are selling at large market caps: each is sitting on a deposit that makes for an "elephant" field - more than ten million ounces of gold for each. However, Novagold was hammered down in 2006 because its feasibility-study estimate proved to be unrealistically high.

In a sense, the above is a variation on the oldest story in the book. Gold-exploration stocks are not unlike tech stocks, in that the most dazzling product (or deposit) attracts the most optimism. Both are susceptible to an auto-catalytic mania, in which overvaluation feeds on itself: the overvaluation is taken as a sign that there's something quintessential about the company, which justifies even higher valuations; etc. I note that neither NovaGold nor Seabridge is terribly overvalued with respect to dollars per estimated ounce of gold in the ground, but it's fields like those that tend to generate said optimism. Beofe NovaGold's scandal, the stock was selling at above $20 per share.

That's the risk of investing in hot exploration companies: the highest levels are nosebleed levels. One way around it is to focus upon less exciting exploration stocks with mid-level deposits, ones that aren't worth a takeover bid right now. These stocks don't offer the chance of becoming billion-dollar behemoths, but they aren't susceptible to the hype and excitment that elephant-field stocks are. Of note is the main barrier facing any exploration company that's otherwise mine-ready: capital costs. Even if a company has a solid feasibility study with an acceptable internal rate of return, the amount needed to bring the mine into production may be too daunting to secure bank financing - and too dilutive for a secondary offering, or private placement, to secure the needed funds. Typically, private placements offer warrants as part of the deal with a strike price that's 25-50% above the offer price. The typical deal offers 1/2 of a warrant per share with an expiry date of 18 months. In order to get the funds through a private placement, therefore, involves a lot more dilution than is immediately the case unless the warrants are destined to expire worthless. [One side effect is that the company may have more money in treasury than it needs if the warrants are exercised. I should note that an exploration stock with a hot property can get away with a straight private placement without warrants, as has been the case for Nova and Seabridge.]

There is a case to be made for an exploration company that holds an unglamorous, mid-range deposit because its capital costs are relatively low. It's unexciting, but few people lose their heads in such a situation. Also, the downside is lessened: such stocks typically have low market caps. However, those kind of stocks also lack the upside potential that an elephant company has and they're usually not worth taking over.

Even major producers have their problems. This Montreal Gazette article explains the troubles that Kinross Gold has had with its flagship Paracatu mine in Brazil: its ore has proven to be more difficult to process than previously expected, which took a bite out of its third-quarter earnings last year. Also dogging Kinross is a possibly inadequate internal rate of return of its huge but low-grade Cerro Casale deposit. The capital costs for the latter have ballooned from $2 billion to an estimated $3.6 billion. The other company mentioned, Aginco-Eagle, has had trouble with two of its newly-opened mines: one had lower grades than expected, and the other had a slower-than-expected ramp-up.

Such are the risks: no-one really knows what's down there until a mine is actually opened and brought onstream. Until then, what data there is, is based upon (possibly overoptimistic) estimates.

Update to the last: As it turned out, Agnico-Eagle's fourth-quarter results beat the Street by five cents per share: 31 cents instead of an expected 26. Kinross swing to a profit of an adjusted 21 cents per share, which was better than analysts expected; the estimate was for 16 cents. The company also announced it was selling its 50% interest in the above-mentioned Cerro Casale deposit to Barrick.

So, the above-linked Gazette story could be chalked up to jitters...but those risks still remain for the sector as a whole.

Quiet As Gold Consolidates Gains

Gold didn't move all that much last night. When evening trading began, the price drifted down to the $1,115 level, reaching it at just before 9 PM ET. It stayed there for more than an hour and then drifted up until about 11:30 PM, at which it bumped up a few dollars an ounce. A pullback to $1,114.30 ended at about 2:30 AM, followed by a jump to the $1,123 level. After a lesser pullback, gold made an early-morning high of $1,124.90 as of 4 AM. That gain didn't last, though, as the metal pulled back to the $1,115 level once again. After bottoming at just before 6:30 AM, the price began climbing again. As of 7:47 AM ET, spot gold was at $1,122.20 for a gain of $3.10 on the day. The Kitco Gold Index had gold down $3.20 due to strengthening of the U.S. dolllar, so a gain of $6.30 was attributed to predominant buying.

The U.S. Dollar Index was also directionless last night, although with a slight upward drift during the first half of night trading. The Index made its nightly peak at 79.72 as of around 8:50 PM. That level was the first of a triple top, made over the course of the next twenty minutes, after which the Index pulled back a little. A drop just before 12 AM put the Index at 79.625 as midnight. Early morning trading saw a rally starting at 1 AM, which bumped up against the 79.67 level before leaping up above it as of 1:40. The peak came as of about 2:05 AM, at 79.79, followed by a drop that took the Index down to its early-morning low of 79.55 as of around 3:15 AM ET. This drop reversed into a stronger rally that started with a double bottoming, but took the Index all the way up to 79.91 as of about 6:35. Since then, the Index has pulled back a little; as of 8:18 AM ET, it was at 79.86.

A Wall Street Journal Online report contains caution, with the first cited expert noting that gold's gains are part of an overall gain in commodities that have accompanied an easing of pressures in Euroland. The second quoted is still bearish:
However, much of gold's recent gains are being attributed to speculative interest.

"The rally is on [a] weak footing," said Commerzbank. "Most of the recent increase was driven by speculators."

Commerzbank predicts gold will trade even lower in the first half of the year, but if the SPDR rise Tuesday is the start of renewed investment interest, that will buoy prices.
However, the first, James Moore of, is looking at the $1,140-$1,162 area should gold move and stay above $1,125. Also noted in the report is the fact that SPDR Gold Trust (GLD)'s holdings have gone up, even though they're still below the amount they were at as of the start of this year. (To be specific, GLD now holds 1,118.30 metric tons. Although lower than Jan. 1st's, it is higher than as of a month ago.)

Another report, from the Financial Times, quotes an expert who attributes gold's rise to a sight long sought but little seen: rising global inflation.
James Steel, precious metals analyst at HSBC, said evidence of rising inflationary pressures in both the UK and India, an advanced and major emerging market economy, were an “outright positive” for gold prices.

Mr Steel noted comments from Thomas Hoenig, president of the Kansas City Federal Reserve Bank. Mr Hoenig said that the fiscal outlook for the US economy posed a risk to the Federal Reserve’s ability to achieve its dual objectives of price stability and sustainable long-term growth and even posed a threat to the US central bank’s independence from political authorities. [His remarks are covered in greater detail here. They raises the question of whether or not the Obama Administration's beginning to jawbone the fed a little.]

“The likelihood, however remote, that accumulated debt will force the Fed to monetise US debt and that the Fed could lose some of its independence, is supportive of gold prices, due to its inflationary implications,” said Mr Steel.
Also contained in the report is an excerpt from a World Gold Council report on fourth-quarter demand for gold, which notes that both jewelry and industrial demand were up from the first quarter. The former was at 500.4 tonnes, thanks largely to a partial rebound in the Indian market, but both categories were down 20% and 16% respectively from the fourth quarter of 2008. Overall gold demand, as a Bloomberg report details, was up 2.6% in 4Q '09 to 819.7 tonnes. Investment demand jumped 77%. Also noted is George Soros more than doubling his goldings in GLD in the fourth quarter. GuruFocus has the add at 152.14%, and noted value investor Jean-Marie Eveillard adding to his own position somewhat.

The latest bit of U.S. economic news has housing starts rebounding to a stronger-than-expected 2.8% in January. The news helped strengthen the U.S. Dollar Index somewhat: as of 8:59 AM, it's at 79.94. Gold has pulled back somewhat to $1,119.80, shaving the day's gain to $2.00.

The consolidation phase has arrived, it seems.

Tuesday, February 16, 2010

Gold Run-Up Still Continuing But Choppy

Although headwinds sprung up, late morning trading has been fairly good for gold - quite good, given the rise in its price earlier this week. After shooting up more than eight dollars an ounce at the opening of regular trading, the metal pulled back about six dollars between 8:45 AM ET and 9:45. Later, it climbed back up and made a new daily high of $1,120.90 at about 10:50 AM. Since then, it drifted back down somewhat. As of 11:30 AM ET, the spot price was at $1,115.20 for a gain of $16.20. The Kitco Gold Index allocated that gain into $9.10 due to predominant buying and $7.10 due to U.S. dollar weakness.

Weaken, the U.S. Dollar Index did. It poked through a 80.05-80.15 range at about 9:15 AM ET and climbed up to a little over 80.20 by 9:37. However, that move up turned out to be a head-fake. The Index drifted down shortly after hitting that level, sinking slightly below 80.15 by 10:30. The sell-off accelerated shortly afterwards, taking the Index down below 80 by 10:45. The downturn grew less intense but still continued until twelve-minute a resting spell at the 79.86 level. As of 11:30 AM ET, the Index was at 79.86.

As morning turns into afternoon, the proportion of gold's gain allocated to U.S. dollar weakness is growing. The recent weakness in the greenback isn't translating into renewed strength in gold. The afternoon will show if gold's pausing will continue.

Update: The weakening in the U.S. Dollar Index has continued; selling pressure drove it down to just above 79.6 as of around 12:30 PM ET. The drop was fairly smooth, with little pullback, until it stopped at that time. Since then, after a halt at the 79.65 level, the Index climbed back up somewhat but was still soft. As of 1:26 PM, it was at 79.68.

Despite that weakness, gold hasn't really benefitted. After a near-term double peak at 11:37 and :45 AM, at about $1,118.50, the metal slid back to the $1,115 level in a slowly descending channel. The support at 1,115 has held so far, but the price did nudge at it. As of 1:27 PM, spot gold was at $1,116.60.

The Kitco Gold Index had most of the $17.40 gain due to U.S. dollar weakness. $9.80 is assigned to it, while only $7.60 is allocated to predominant buying.

The headwinds are still there. $1,115 is holding, but the the price is still above bargain-buying support levels. The day's price range is at an important resistance level, particularly the one in the neighborhood of $1,110, so further lassitude wouldn't be surprising.

Update 2: $1,115 did end up holding, although the gains were sparse in the rest of the afternoon. The gold price climbed in two irregular waves, the second making it to the $1,120 level just before 3:30 PM ET, but neither made a new day's high. After reaching that level, gold tailed off, fluctuated for a little bit, and ended the regular-trading day at $1,117.80. The $18.30 gain on the day was allotted by the Kitco Gold Index to $10.50 due to weakness in the U.S. dollar and $7.80 due to predominant buying.

After skidding yet again, the U.S. Dollar Index was fairly quiet. The slide that was in progress as of the last update continued until 2:30 PM, when it reversed somewhat. A further decline started at 3:00, which took the Index down to 79.58 at about 3:40. The Index then rebounded half-way and spent the rest of the session in a trading range bounded by the 79.61 level on the downside and the 79.65 level on the upside. As of 5:30 PM, it was at 79.64.

This daily chart of the Index shows a spill that may be portentous:

Although this fact doesn't directly pertain to the U.S. Dollar Index, it's nevertheless indicative: the net non-commercial euro short position for the dollar-Euro contract was at a record high as of last Friday. In other words, the non-commerical U.S. dollar longs were at a record. The Index fell an awful lot today against the non-commerical positioners, which are traditionally (if cynically) regarded as the sheep of the shearing show. Even players don't think too much of speculators, unless they show talent at it over a long horizon. (Then, if they're big, they tend to be worshipped.)

There's no guarantee that a non-commercial bandwagon will be frustrated, even if it's mainly composed of oft-looked-down-upon small speculators. Once it is, though, a bandwagon of that sort suggests a lot of weak hands will be looking to exit in order to cut their losses or bank what's left of their profits. As of now, the greenback could be said to be at the lower end of a trading range - but it's still pretty low. In addition, the MACD line has crossed over to the bear side and the RSI is plummeting. Neither of these two indicators, in and of themselves, suggest that a major reversal is coming or that a mini-bubble is about to burst. The MACD went bearish at the beginning of January, which foreshadowed the continuance of a modest decline, but it crossed over to the bull side at a higher level than its earlier bear cross. Anyone trading using it would have either lost money (though shorting) or cut out some of the buy-and-hold gain (though exiting.) The RSI is at a lower level than it was at the last MACD bear cross, but not by much.

I've spent some time on the technical position of the Index because it pertains to a chart pattern seen today on the gold daily chart. Look at today's price movement on the far right and you'll see a chart pattern known as a "gap."

There are four kinds of gaps: common, breakaway, runaway, and exhaustion. As its name indicates, the first kind is the most frequent. This kind of gap will eventually be "filled," meaning that the market got ahead of itself at the time of the gap. Despite the potential of a spike due to a dropping U.S. dollar, and despite the new record price for gold in Euro terms, I would assume that the above gap is a common one even if it may take some time to be filled. Despite the risk of an imploding mania in the dollar/Euro trade, the greenback's still in a bull trend. The U.S. Dollar Index could descend to 78.5 and still be considered to be a solid climber, because 78.5 marked its last intermediate high.

Returning to gaps, the only other fits right now are a runaway gap or an exhaustion gap. The first isn't likely unless the U.S. dollar is due for a real turn in trend, and the second isn't probable because of sub-$1,100 bargain buying.

Granted that gold has had a good run over the last week, and it's climbed in the face of accompanying skepticism, but there isn't enough catalyst to re-ignite the long-term bull market as yet. The long-term reasons pertaining to the vulnerability of the U.S. dollar are still potentialities. Inflation is poking its head up, but at most in a few countries. (China, the U.K., Australia.) The factors' abeyance do not say that gold is going down, but they do say that gold has no catalyst to drive it up. Lately, bargain hunting has provided a floor and a kind of catalyst. At these levels, it won't be there anymore.

I don't mean to rain on anyone's parade, let alone project a pessimistic opinion on gold, but I don't see any drivers that would make the above-mentioned gap anything more than a common gap. The identity of it will be made more clear in tomorrow's trading.

[By the way: a pair of common gaps I pointed out nine days ago have both been filled on the upside.]

China, Inflation And Revaluation

A Wall Street Journal article webbed by Yahoo! Finance discusses a geopolitically sensitive subject: the value of the renminbi, or the undervaluedness of it. The piece explains the fear that PRC officials have regarding their currency: a substantial upvaluation of the yen after 1985 squeezed Japanese growth. It's likely believed in the PRC that allowing the renminbi to shoot up will kill off growth and make for a "Lost Decade" (or worse) in China.

However, PRC officials may be amenable to a small upvaluation because of rising inflation:
Most Chinese economists say they think their nation's large trade surplus is best addressed with domestic policies to lower high savings rates. "To only focus on the exchange rate is the wrong approach. You have to look at fundamentals," said Yao Yang, an economist at the China Center for Economic Research in Beijing. "It will kill China's economy if you appreciate the renminbi by 20% in one month."

The costs to China of a big exchange-rate move would be immediate and concrete: export factories whose goods suddenly got too expensive would close, idling workers. Yet the benefits that proponents say come from yuan appreciation are diffuse and abstract: chiefly, a more "balanced" global economy.

So what could persuade China to revalue? The most likely factor is inflation....

Thanks to its government stimulus, China's economy has recovered well ahead of the rest of the world. The problems of rapid growth also have arrived early: Consumer prices were up 1.5% from a year earlier in January, and are expected to accelerate in coming months. The central bank has already raised banks' reserve requirements twice this year, most recently on Friday, aiming to contain a boom in credit as housing prices soar.

China's government tried to counter the last surge in inflation, which began in 2007, with currency appreciation. The yuan gained about 15% against the dollar until authorities returned to a de facto peg in mid-2008. A similar response now is plausible....
Later, the article says that any upvaluation on that basis would be more modest - more likely to resemble 2005's guided and slow one.

A rise in Chinese inflation is, of course, one of the factors pushing up Chinese demand for gold. An upvaluation would tend to lower PRC international competitiveness, but it would also lower prices of imported goods.

One possible side consequence: despite Chinese resistance to another Plaza Accord, a gentle lowering of the U.S. dollar is workable in this framework. Although a co-ordinated move would lessen the price drop of imports, it would also lessen the impact on Chinese competitiveness in other currency zones. The U.S. government has incentives of its own for a lowered greenback, revolving around export promotion. And, if the PRC rulers express a wish to upvalue the yen, they can hardly complain if a gentle drop in the U.S. dollar lowers the value of held U.S. Treasury securities. After all, an upvaluation will have that effect anyway.

The potential losses are lessening, anyway: as of December of last year, the PRC is the second-largest holder of U.S. Treasury securities thanks to net sales of $34.2 billion' worth. That move doesn't seem to have affected T-rates all that much.

Gold-As-Insurance Meme Spreading, Or Money Magazine Bends

Walter Updegrave, a senior editor with Money Magazine, fielded this question that more than a few of us would like to be in a position to ask:
Question: I took some money from a maturing CD and bought gold when it was selling for around $800 an ounce. How can I know when it's a good time to sell this gold and reinvest elsewhere? And what should that elsewhere be? --Christine, Cocoa Beach, Florida
His answer follows the standard asset-allocation template: it's better not to chase investments, swayed by the hope of getting into the next high performer. A wiser approach is to diversify using an asset-allocation strategy, putting money into fixed percentages of assets and rebalancing once per year. He says that the allocation model can include gold, in the standard 5-10% insurance ration.

I mention this answer in part because Money magazine got some notoreity in the goldbug world for dumping on gold as an investment. Perhaps editorial policy has changed a little in the interim.

Optimism Rebounding Along With Gold

A Bloomberg report, as webbed by Business Week, passes along the latest forecast from Citigroup's technical-analysis department: should gold make it above $1,104 and stay there, its move "would constitute a 'bullish break' and might signal a further climb toward the January high of $1,161.
“The price action down from the high in December looks corrective, and we believe the market is at risk of turning back up again over the coming days and weeks,” Citigroup technical analysts led by Tom Fitzpatrick in New York wrote today in a report.

Not mentioned: the last time gold forded up to that level, it was knocked down by the People's Bank of China announcing a reserve-ratio hike for the Chinese banking system. A later announcement has done little to hold the gold price down, but an outright rate hike might.

Gold Up, Indian Demand Down

The $1,100 threshold is still stuck to in the Indian physical-gold market, according to a Reuters report:
India gold demand remained weak for a second day on Tuesday as prices stayed above $1,100 an ounce levels, reversing last week's pick-up in purchases, dealers said.

"There are no buyers after the overnight jump in prices... I did a few deals $1,100 (an ounce)," said a dealer with a state-run, bullion-dealing bank in Mumbai....

That source of demand was a real help with staunching the decline last week; if gold consolidates at these levels, there won't be any further help from the Indian market this week.

Ernst & Young Forecasts Mining M&A To Double This Year

That doubling is from a low base, the Bloomberg story on the subject reports. A double from last year's levels would bring M&A activity up to 2006 levels.

Chinese and Indian buying are expected to help push the totals up, but public companies are expected to do so too:
Mining companies such as Anglo American Plc and Vale SA sold a record amount of dollar bonds last year to bolster war chests for acquisitions, expansions and buybacks. China, the world’s largest metal consumer, may add to last year’s record $32 billion spending on resource acquisitions.

“Many mining and metals companies are looking for acquisitions to fast track supply pipelines, driven by confidence in ongoing underlying demand in China and India,” Elliot said. “We are seeing a lot larger lists of potential buyers than there are assets available.”...

There's already takeover buzz in the junior-mining circuit, although none that I know of which singles out any specific companies.

Through Long Weekend, Gold Rises

This Presidents' Day, as it turned out, was good for gold. There was a bit of a rally to start off the Sunday session, which didn't last. Monday, however, saw a real upswing as gold sailed to the $1,100 level and, in the evening, beyond. By Monday night, gold was bumping up against the $1,105 level, besting it just after 11:30 PM ET. A second climb, starting just after 2 AM, moved the metal to a little below $1,110 and, after a pulback, above $1,115. It crested at the early-morning high of $1,117.80 around 3:30 AM ET. Since then, a slight downdraft has pulled the metal's price back a bit; as of 8:02 AM ET, spot gold was at $1,111.60. The $12.20 gain on the day has been divided up by the Kitco Gold Index into $2.55 due to weakening of the U.S. dollar and $9.55 due to predominat buying.

Seemingly, some of that predominant buying has come from Euroland. Despite the greenback being the immediate beneficiary of the Eurocrisis, gold has benefitted too. In Euros, gold has set a new all-time record. The high of 816.33 bested December 3rd's 812.43. So, the pullback in U.S. dollar terms can be ascribed to strength in the greenback.

The U.S. Dollar Index went for a bit of a ride Monday morning, but failed to hold at that level. A triple top at the 80.51 level between 1:15 and 2:10 AM presaged a bumpy early-morning drop that ended just below the 80.2 level as of 7:05. After a comeback rally that stopped at 80.47, the Index slumped to the 80.35 level. A slow climb, interrupted by a Presidents' Day trading hiatus, ended at 80.41 as of about 7:30 PM. Since that point, until 3:20 this morning, the Index dropped, reaching the 79.95 level. Since then, it rebounded slightly into a trading range bordered by 80.05 and 80.15. As of 8:17 AM ET, the Index has poked slightly above the top of that range to reach 80.16.

This Marketwatch report notes the rise, but points out that it may have been exaggerated by low volume. It wasn't just the American holiday that dampened volume; it was also the Chinese New Year holiday. This explanation was given in the report:
Gold gained "on the back of the stronger euro," said James Moore, an analyst at, in a note to clients.

"The metal is vulnerable to a euro-related pullback and now needs to clear resistance around $1,125 to cement more bullish sentiment," Moore said.
The record Euro high was mentioned early on in a Wall Street Journal Online report. The two quoted gold watchers were more optimistic than was Moore:
"It looks like safe haven buying is coming back into the market," said Michael Kempinski, a precious metals trader at Commerzbank in Luxembourg. "People are afraid of paper currencies and inflation."

A trader in London echoed a similar view, saying the euro's status as a safe currency has been damaged by fears of debt defaults in Greece and other euro-zone countries. "The two major reserve currencies are weak, so why not buy gold?"
Despite that optimism, the article ended with the prediction of a near-term consolidation phase. In an unrelated Euroland development, reported inflation in the U.K. has shot up to 3.5% on an annual basis. The main explanation given was a rise in the VAT rate and in items that the U.S. statistics consider to be non-core. Bank of England governor Mervyn King said that the rise above the 1-3% Bank of England target range was temporary.

The strength of gold in other currencies is shown in this chart of the Kitco Gold Index (KGX) over the last six months:

Ever since the December 3rd high, gold's been in a channel if the influence of the U.S. dollar is factored out. The KGX was actually at its worst in late December even though gold hit a 2010 bottom almost two weeks ago. Of note is that fact that the KGX is up more in percentage terms than gold itself since mid-August.

Regular trading has opened, and gold has bested its earlier high. In a departure from the recent usual, gold climbed as soon as the COMEX session got rolling. The early-morning high mentioned above was bested; the new high of $1,119.60 was made at 8:45 AM ET. Since that jump, gold has pulled back a little: as of 8:52 AM ET, the spot price is $1,115.80. The U.S. Dollar Index has stayed in the above-mentioned range, pulling back to 80.06 around that same 8:45 before recovering to 80.10 as of 8:52 AM.

Despite the continued high level for the U.S. dollar, the vim is back in the gold market. How long it will continue to be so, remains to be seen.

Sunday, February 14, 2010

Happy Presidents' Day/Family Day

Happy holiday if you rate it. Since the U.S. markets are closed tomorrow, I'm going to resume as per the usual schedule on Tuesday morning.

'Til then, thanks for stopping in - and have as much fun as you can.

Hard Times For The HUI...Until Recently

One of the disappointments of the latest phase of the gold bull market has been the Amex Gold BUGS Index, or the HUI. The HUI hits its high in mid-March of 2008, a little after gold poked its nose up to the $1,035 level. Taken down by the financial crisis like all stocks, the HUI stayed stable between 400 and 475 until late July; at that time, it entered a vicious decline that didn't end until it had hit 150 in late October. Anyone who went bullish at that time got in at the low for HUI, unlike those who went optimistic for stocks in general. Gold got above $1,200 before the HUI matched its March '08 high. As the metal went down, so did the index. Just last week, on Feb. 4th and 5th, the HUI was riding 370.

This chart shows an overall three-year disappointment, which got people asking "where's the leverage?"

Note, though that the RSI index on the top of the chart touched the below-30 oversold level last week. It hasn't done so since November of 2008.

In and of itself, that oversoldness doesn't say much that's bullish. The index also got in the oversold range in early-mid August of '08 and early September. Both of those sub-30s were followed by partial recoveries in the index itself which turned into worse declines.

However, those disappointments were due to the financial crisis wreaking its wrath. There may be another black-swan even of the negative kind, but the only candidate is the so-called PIIGS in Europe. As of now, things look contained in the continent.

Since the index is a basket of unhedged major gold miners, the earnings of the component companies are decisive in the fate of the HUI. That being said, I'd like to pass on a tip from Fred Hickey of the High Tech Strategist: he said that the miners' "all-in" costs were about $900/oz or more last year. That's because of the oft-noted cost squeeze that's bedeviled the major producers.

With gold at four digits, though, these companies can now make a serious profit. That's why Hickey expects the recent run of good earnings news (Randgold, Harmony) to continue. He also notes that input costs are contained right now.

[H/T: the fourth hours of this weeks' Financial Sense Newshour podcast - .mp3 file. High Tech Strategist has no Website.]

Given that the fundamentals seem to be going the HUI's way, for a change, the recent upturn in the index may be portentous. The chart of the HUI:Gold ratio looks awful -

- but at some point, it's indicative of the stocks being at bargain levels relative to gold.