Friday, March 19, 2010

Gold Gets Hit, Plummets Below $1,110

Gold suffered one of those recurrent slam-downs after it had risen a fair bit in earlier days. This plummet seems to have been prompted by U.S. dollar strength, and the safe-haven money flowing from the metal to the greenback. As has not infrequently been the case, the recovery of the greenback revealed an air pocket in the metal's price.

At the start of regular trading, gold drifted between $1,122 and $1,123. A rally started around 8:45 AM ET, which pushed gold up the the $1,125 level by 9:00. A brief spike took it up to $1,128.10 before the metal sunk back to just above $1,123. It was at that level when the plummet started at 10:20 AM.

Within ten minutes, it had bottomed at $1,104.40. A relief rally pulled it up to $1,110, but that level was not bested; over the next hour, gold was trading between $1,105 and $1,110. As of 11:25 AM ET, spot gold was at $1,105.70 for a decline of $20.20 on the day. The Kitco Gold Index divided the loss into $12.70 for predominant selling and $7.50 for strengthening of the greenback.

The U.S. Dollar Index has made for something of a comeback story. Its rise started slowly, but became steady as the morning wore on. As of 9 AM ET, it was just above 80.5. As of 11:19, it was almost at 80.9. There were some pullbacks along the way, but not any significant ones. 80.5 was left in the dust, making for a catalyst for gold's plummet.

The afternoon may see some relief action, but the damage has been done. A full-scale rebound isn't likely. We may even see gold touch $1,100.

Update: Gold didn't descend quite that far, but it got close. It hasn't recovered all that much either, despite a little help from the U.S. Dollar Index.

From 10:30 AM ET to 11:40, gold moved in a downwards right triangle with $1,105 as the floor. After a slight rise, that floor was broken though as of 12:10; gold slumped to $1,102.50. After a pause, another decline took it down to the day's low of $1,100.70 - within a dollar of $1,100. Subsequently, though, the metal rose in a small ascending channel that took it up above $1,105. An additional spurt-up took the price comfortably above that level. As of 1:42 PM ET, spot gold was at $1,108.10 for a loss of $17.80 on the day. The Kitco Gold Index attributed -$12.00 to predominant selling and -$5.80 due to U.S. dollar strength.

The greenback slumped back somewhat, but it was still comfortably above 80.5. The high of the day for the U.S. Dollar Index was reached as of 11:20, at 80.89, and the Index fell for the next fifty minutes. A relief rally got it up to 80.83, and the gentle decline continued until halting at 1 PM. Since then, it's been in a trading range between 80.65 and 80.75. As of 1:44 PM ET, the Index was at 80.72.

Most Friday gold-market sessions are quiet later in the afternoon. Given that backdrop, it's not very likely that gold will reach and stay above $1,110. If it's any consolation, the metal's a lot less likely to see $1,100. The rest of the afternoon will show whether or not a trading range does transpire.

Update 2: The price ended up in between; a trading range did result. Between 1:30 and the end of the week's trading, gold drifted with little direction between $1,105 and $1,110. There was a dip between 3:30 and 4:30, to just above $1,105, but it slowly reversed until the metal hit its closing price of $1,107.90. The loss for the day was $18.00, which the Kitco Gold Index divided into -$6.30 due to a strengthening greenback and -$11.70 due to predominant selling. In the drift, there was respite.

For the week, the metal actually gained; that was because last Friday's close ended a week with a large loss. Gold gained $6.40 from last Friday's close, or 0.581%. Had it not been for this morning's slamdown, the gain would have been much larger.

The U.S. Dollar Index also drifted for the rest of the afternoon, slightly upwards before making a spurt up at the close as of 5:00. It ended the week at 80.77.

Its daily chart, from, shows yesterday's volatile indecisiveness has translated into upward volatility:

The 80.5 resistance level was definitely broken, showing that the greenback can't be counted out when the panic starts. Even if gold was pushed up by the crisis too, the first choice when it's panic time is still the U.S. dollar. The 79.5 support level held, suggesting that the excitement over the U.S.-PRC currency squabble (which caught my imagination too) was premature with respect to a greenback decline. The Index might have one more day's worth of run in it.

(Just goes to show me: I can't count on a short squeeze.)

The chart for gold looks less encouraging:

The return of the MACD lines to a bullish cross, as shown by a positive value on the histogram for yesterday, was indeed a one-day fake-out. They returned to a bearish configuration today. This week looks a fair bit like the week between Feb. 16th and 22nd, with this exception: there were declines three days after that bump-up against a resistance level, but those declines were relatively mild. Today's decline, in contrast, was fairly severe.

It might not last. There are quite a few buyers who have settled in on $1,100 as a bargain range. Unless today's plummet convinces those buyers to hold out and wait for another drop, which didn't work the last time gold got around $1,100, there should be real support from tighter hands than tight-stop traders. It's this fundamental factor that restrains me from drawing what would be a bearish inference which the chart alone conveys for the near term.

The Commitment of Traders graph for the Euro, with positions as of last Tuesday, is a wonder to behold. A lot of commercial longs exited their positions from March 10th to March 16th; the number of commecial long contracts shrunk by more than half in one week: -51.6%, to be precise. Commerical shorts shrunk by an even greater percentage, although less in amount. Non-commercial shorts didn't shrink all that much comparatively speaking, but the percentage did by more than 10%. The most amazing shrinkage was in total open interest: it shrunk by almost exactly 50% over that one week. The downward curve followed by directionless volatility from Tuesday before last to last Tuesday was evidently too much for a lot of contract-writers, both commercial and non-commercial, to stand - particularly, the former category.

The COT graph for the U.S. Dollar Index showed a similar shrinking in total open interest, although less extreme than that for the dollar-euro contract.

Gold's COT graph, in contrast, showed little change in open interest from Mar. 10th to Mar. 16th. Despite gold moving up in that timeframe, non-commercial longs shrunk a little; commercial shorts shrunk a fair bit. Interestingly, non-commercial shorts increased, while commercial longs decline a bit. Total open interest shrunk, but by only 1.33%.

Returning to today's action in gold, a Reuters report attributed today's rout to a selling cascade triggered by weakeness in the euro; traders were reluctant to buy. Amongst the bullet list of points in the report were these:

* Gold pressured by a dollar rise against euro amid sovereign debt worries surrounding Greece.

* Flight-to-quality buying due to uncertainties about currencies and global credit outlook supports market -traders.

* Gold price should remain supported as long as uncertainties over Greece exist - Commerzbank.

* Prior to Friday, the metal has been able to hold firm this week despite a strong dollar
That firmness turned into yet another air pocket, suggesting that part of it was caused by anticipations of a further fall in the greenback that were "shaken awake" today.

It's not much comfort that gold ended the week with a gain; a similar rout visited it nine days ago. Still, the $1,100 support level has held; despite how porous it may be, it's rooted in bargain hunters' evaluations that will continue to give it some force. There's some comfort to be drawn from the framing of gold as being in a longer-term trading range between $1,080 or so and $1,140 or so. Such a perspective implies that there isn't much bearishness in the plummets, even if the implication is that there isn't much bullishness in the good days.

Thanks for reading, and have a warm weekend...even if inside.

Hyperinflation As Product Of Deflationary Forces

Jordan Roy-Byrne's model of hyperinflation is a little different from the standard one: hyperinflation (or stagflation) results from deflationary forces. He meets the standard explanation when he says: "It is not a rise in inflationary expectations but a loss of confidence in a country being able to repay its debts."

The risk of hyperinflation comes in when government debt has to be monetized by the central bank because the interest payments are just too high for the federal budget to withstand. Instead of resulting from overstimulation, or a Keynesian Red Queen's Race, it results from a government-bond financing crisis.

He holds up as an example Iceland, whose economy shrunk by 8% while prices rose 11%.

His advice is to watch the bond market, and how gold does compared with it. Should the bond market cave in, the U.S. will be at risk for that kind of hyperinflation because servicing the debt will be too much to handle.

Roy-Byrne's model makes some sense, and does tie in with previous hyperinflationary episodes. The deflationary forces he refers to are ones created by too much debt overall, including government debt. By deflation, he seemingly means debt deflation in an economy already clogged with debt. Had that not been the case, there would be no potential confidence crisis.

Also, the government has to borrow hugely to fend off the crisis.

SPDR Gold Trust Makes Top Of Wall Street Journal's Selling-Into-Strength List

That list tracks stocks that rose in price but had the greatest selling pressure despite the gain; it's a rough indicator of distribution. The SPDR Gold Trust (GLD) made the top of the list for yesterday.

Perhaps coincidentally, gold was hammered at about 10:20 AM ET. In the space of ten minutes, the metal fell from $1,123 to $1,104.40.

Gold In 1980: A Vignette

If gold is going to go into an all-out bubble with a climactic ending, then it would pay to look back at the climax of the last bubble in 1980. A thumbnail timeline has been provided by "True North" at Seeking Alpha.

The context of gold's sudden rise to $850 and its sharp drop back down was a world where America was on the defensive geopolitically, in addition to being ridden by double-digit inflation. Paul Volcker had begun choking off inflation, but the gold market didn't believe it at first. The final spurt upwards for the metal was impelled in part by an announcement of 13% inflation in the U.S. as of December 1979. The Hunt Brothers' silver accumulation scheme had fallen apart at about the same time the peak in gold was hit. These and other items are in the list.

Demand For Austrian Philharmonic Drops 80% This Year

It's a dramatic figure, but last year's sales of the Austrian Philharmonic bullion coin had a dramatic increase. The financial crisis, and gold's notable performance, helped push up demand for bullion last year. Now that the original crisis has faded, and recovery is in sight, bullion demand has dropped.
“We’re getting back to business as usual rather than the hectic, panic demand we’ve seen over the last couple of years,” Vienna-based Marketing Director Kerry Tattersall said late yesterday in an interview....

“There’s no more upward surge in gold price to titillate buyers,” said Tattersall, who retires this year after more than two decades with the mint. “A lot of people feel more relaxed about the economic crisis.”

An interesting question is how sales have been affected by the Eurocrisis, which has been too recent to have an effect on their figures.

PRC Government Pushing Gold In A Big Way

According to an article at Paul Fraser Collectibles, there's currently an infomercial and publicity blitz to inform the mainland Chinese about investing in gold and silver and to encourage them to do so. Availability has increased dramatically: every bank now offers bullion over the counter. It still takes some money to play, as the bars are being offered in 500g, 1kg, 2kg and 5 kg weights; less affluent Chinese will have to content themselves with silver, or nothing.
"Simply put, the Chinese government is trying to trigger a national gold craze - and it's working. The Chinese public now has gold trading platforms on steroids," said Paul Atherley, managing director of the gold mining company Leyshon Resources, in a statement.
This item is one that's sure to capture the imagination of a gold bull. There's an old tale, perhaps acryphocal, about Britons a century ago salivating over the riches that could be garnered if every Chinaman bought a wool garment. This item might fuel similar hopes for gold.

The $1,140 barrier

James Turk of supplies a long-term perspective to counter bearish sentiment, and reassure nervous bulls, in a Stockhouse article. He says that gold has bumped into similar stalls over the course of the nine-year bull market, and that the current slog is just one of them. The three-year chart he supplies with his article provides perspective to the more recent period, as it shows the strength with which gold broke out of its $1,000 base last September.

His explanantion for the stalls is central-bank intervention, but "gold periodically gets ahead of itself" suffices.

PRC Sending Cabinet Official To Washington

In the lastest round of the currency dispute between mainland China and America, the PRC has agreed to send over a cabinet official to D.C. in order to explain the PRC's case.
A deputy commerce minister, Zhong Shan, will go to Washington on Wednesday to meet with American trade, commerce and Treasury officials and members of Congress, the Commerce Ministry said. It said they would discuss the Sino-U.S. trade gap and trade disputes....

"A lot of problems can be properly solved so long as we can avoid politicization and emotionalization," a Commerce Ministry official, He Ning, told reporters. "It should not be one side pressing the other side."

He warned that dialogue with Washington might be harmed by "external disturbances" such as this week's letter from 130 American lawmakers calling on Obama to take action.

The use of the phrase "external disturbances" says something about the PRC governmental mindset. They're evidently targeting the executive branch, and believe that the executive branch is in charge of U.S. government. That misapprehnsion may come back to haunt them.

Indian Gold Buyers Still Waiting For Lower Prices

According to an Economic Times report, Indian wholesale demand is still low because buyers are waiting for lower prices before stocking up for the wedding season next month.
"Market is looking at prices below $1,100 an ounce before (we) start gold is still trading around $1,125 ..the Greece problem is giving some support," said a dealer with a Mumbai-based private bank, which deals in bullion.
It notes that the demand for physical was evident when prices were between $1,100 and $1,110.

Gold Falls Through $1,125, Again

Despite the Grecian government pulling back from an ultimatum threatening to seek IMF help if EU aid is not forthcoming next week, the Euro market is still beset by the possibility of the Eurocrisis reflaming. As a result, the Euro was down and the U.S. Dollar Index was up. Gold fell, although the bulk of the fall occurred earlier.

The evening session started off with a dip to $1,125, which was recovered from, followed by a larger drop below $1,125. By 9 PM ET, it was at $1,122. After recovering to above the $1,124 level, reached just before midnight, gold slowly slid down. Another dip to $1,122 at 5 AM was recovered from, but the decline continued anyway. $1,122 was broken through on the downside as of 6:00, and the metal spent some time hovering around that level. As of 8:05 AM ET, spot gold was at $1,122.50 for a drop of $3.40 on the day. The Kitco Gold Index divvied up the loss between $0.80 due to predominant selling and $2.60 due to strengthening of the greenback.

As mentioned above, the U.S. Dollar Index did rise due to a Euro drop. Before the morning part of the overnight session, though, it was in a trading range between 80.2 and 80.35. The rally didn't start until 2:30, and it proceeded hesitantly at first. After drifting back down to the middle of the range by 4:35, it jumped up to 80.5 by 5:00. Forty-five minutes' worth of hestiation preceded another jump, this time to above 80.56 by 6:05. Since then, the Index muddled along around the 80.5 level before pulling up a little. As of 8:15 AM ET, it was at 80.54.

A Wall Street Journal article notes that the pullback in gold has occurred on thin volume as it attributes the drop to worries about Euroland.
Many investors chose to sit out Friday amid uncertainty in Europe over the likelihood of financial aid for Greece. The focus next week will be who rescues Greece and that will keep the euro under pressure, thus limiting gains in gold.

"There is so much uncertainty about where the financial markets are going," said Standard Bank commodity analyst Walter de Wet. "At this stage people are sitting on the sidelines watching."
Also in the article is a portrayal of gold as tugged between safe-haven demand and currency uncertainty.

The same conflict is cited in a Reuters report that says traders were given hope by the small extent of the decline overnight.
"On the one side the dollar is weighing on prices, but on the other we are seeing continued inflows from investors," said Commerzbank analyst Eugen Weinberg. "Gold has been resilient against dollar strength, which is actually a good sign."

"As long as we are trading above $1,120, we will be pretty much rangebound," he added. "Should prices drop below there, we could see some downward pressure developing, but at the moment we are seeing a sideways move on gold."
Also mentioned is a World Gold Council report that expects global recovery to lead to an increase in jewelry demand, and with investment demand.

Regular trading opened with no direction to speak of; gold is still hovering around the $1,122 level. As of 8:46 AM ET, it was at exactly $1,122.00. The Kitco Gold Index attributed all but 10 cents of the decline to greenback strength. As for the U.S. Dollar Index, it made a couple of runs at 80.6, both of which fell back somewhat; as of 8:48 AM, it was at 80.54.

All in all, this morning's decline hasn't been that much. It's still a decline, though, and it may preface more disappointing price action today. The U.S. dollar is still a big influence.

Thursday, March 18, 2010

Gold Takes Tumble, But Recovers

The U.S. dollar has come back, and that resurgence has taken its toll on gold. The Eurocrisis is the cause, as any aid to the Grecian government has not been forthcoming as expected. Credit default swap prices on Grecian sovereign debt have risen as a result, and prices for the bonds themselves have dropped. So have prices for bonds of Spain and Portugal.

Building on a slight rally that started in the data-release window today, the U.S. Dollar Index has climbed up in later-morning trading. As of 10 AM ET, it was at 79.95. As of 11 AM ET, it was at 80.05. As of 11:30 AM ET, it was at 80.32.

That strength has taken its toll on gold. Regular trading opened with a slight handicapping rally, which was drained off by the release of the CPI data. Another handicapping rally just before 10 AM was defeated too, and the metal stumbled starting at 10:30. For $1,125, it reached $1,121 just before 11 AM. After a recovery rally to $1,123, the price dropped to $1,119 between 11:10 and 11:15. As of 11:34 AM ET, spot gold was at $1,119.90 for a drop of $5.20 on the day. The Kitco Gold Index sliced $9.05 off the price due to U.S. dollar strength, and actually added $3.85 due to predominant buying. The influence of the Eurocrisis is being felt both ways, even if the net was not beneficial to gold as of late morning.

The U.S. Dollar Index was still rallying. Gold stopped declining for the moment, but it dropped enough to make the $1,125 resistance level a reality again. The afternoon sesssion will show how vulnerable gold is to futher adverse winds.

Update: The dip down to the $1,120 level didn't last; the $1,125 resistance level turned into support.

[Note: For some reason most of the first Update was lost. The meat of it has been incorporated into Update 2.]

Update 2: Gold ended with a gain on the day, but it was only a slight one. The afternoon saw a recovery from the late-morning spill, as the latest round of the Eurocrisis faded away.

Actually, the Eurocrisis provided much of the lift for gold once the safe-haven demand moved out of the greenback. The U.S. dollar, although strong in the morning, pulled back in the early afternoon before making a saucer-shaped bottom around 2 PM. Gold felt the influence of the greenback creeping upwards, but not enough to take it away from the plus column.

Between 11:15 AM ET and just before noon, gold was stuck at $1,120. Then, just after 12:45, it plopped down to $1,107.60; that drop quickly reversed itself. Then, a rally took the price up eight dollars an ounce by 12:25. Trading was indecisive until 1:20 PM, when another rally developed which took gold up to $1,130.70 right after 1:30. After another period of hesitation, the metal fell down and entered a range between $1,126 and $1,128; it stayed there until closing. As of the close, spot gold was at $1,125.90 for a gain of eighty cents on the day. The Kitco Gold Index attributed an $8.90 gain to predominant buying and an $8.10 loss to greenback strength.

After its rally climaxed at 11:40 AM, the U.S. Dollar Index traded relatively sedately. Declining from that level, it slid until it hit 80.13 as of 2 PM. At that point, the decline reversed and a small rally ensued. Although uneven, it pulled the Index up for the next three-and-a-half hours. As of 5:30 PM, the Index was at 80.31.

The daily chart for it (from shows a pretty wild ride today, but one that's been inconclusive:

As the rightmost candlestock shows, the Index veered all the way today from the support level of 79.5 to the resistance level of 80.5. That's a fair span for the Index, especially within a trading range that's held up. The 79.5- 80.5 range has held for the last five trading sessions with no real breakout one way or the other. The close was strong, but was almost at the same level as Monday's.

There's still an overall neutrality in its trading pattern. The bearish take on today's action notes that, despite widespread fears that the Eurocrisis was going to resume because EU aid is far from a done deal, the Index never got above 80.5. The bullish take notes that nothing more than rumours and fears, and generalizations from an ultimatum that might have been a mere negotiating ploy, got the Index well above 80; had the Eurocrisis re-erupted for real, the Index would have flown upwards.

That being said, the near-term trend is still directionless. Also adding to Index bullishness are signs that PRC officials might co-operate with the U.S. government with a renminbi upvaluation.

As for gold, today's gain comes on the tail end of a three-day session whose candlesticks look "blocky:"

The blockiness shows a resistance level just above $1,125, which gold has had a hard time overcoming. It's reminiscent of the action between Feb. 16th and 22nd, although at five dollars greater. Of interest is the fact that the MACD lines on the bottom of the chart have turned from a bearish configuration to a bullish one today; that's indicated by the histogram that they're drawn over. There was a fake-out of that sort on Feb. 3rd, so I merely note today's crossover. The now-ended bearish phase has been unusually short, and may be destined to be longer. Until today's crossover has been backed up by a second day in a bull phase, and possibly a third, it's just a curiosity.

It speaks to a near-term directionlessness in gold, however. Although $1,140 is closer than $1,100, it still could go either way depending upon how events play out. On the good side, for a technical analyst, gold's 50-day moving average (in blue) is not falling.

A Reuters report describes today's action this way: "the metal whipsawed between a stronger dollar and buying driven by sovereign debt worries." It also had this to say about today's trading, amongst other things:
* U.S. consumer prices unchanged in February, failing to drive gold in a definite direction - traders.

* The metal holds firm despite a weaker euro against dollar amid renewed Greece worries.

* Disagreement between United States and China over trade, currency issues provides underlying support to gold - HSBC.

The picture could be worse for gold, especially given the rebound in the U.S. Dollar Index, but it also could be better. Today was a day that could be chalked up to marking time while bound in a range. Tomorrow may provide a greater sense of direction.

Indian Gold Buying Still Slack

According to the Economic Times, wholesale gold buying is still dormant:
India gold buying remained slack for a second day in a row on Thursday afternoon as traders waited for price dips to stock up for the wedding season, and a weaker rupee also weighed on sentiment, dealers said.

"Demand is not good, it is lacklustre like yesterday, traders may be holding on their positions as they anticipate a fall below $1,100 an ounce levels," said a dealer with a Mumbai-based state-run bank, which deals in bullion.
Another dealer quoted supplied a figure that gibes with the first one's: $1,100-$1,110. The same bargain point still prevails.

Leading Indicators Rise More Slowly, Match Expectations

The Index of Leading Indicators for February have been released, and its rise was the slowest in eleven months. In fact, the Index barely rose at all: +0.1% for the month. That rise matched economist expectations, as did the jobless-claim figures. For economist prognosticators, the February timeframe has been a good month.

The U.S. Dollar Index took well to the news: starting from 79.95 at the time of the release, it went up above 80 and was at 80.04 as of 11:04 AM ET. Gold didn't. Despite a two-dollar handicapping rise from $1,125 to $1,127 just before the data's release, the release itself erased that two-dollar gain. From 10:30 to 11:00, the price fell a further four dollars an ounce before recovering slightly.

ETFs' Influence On Investment Demand

The whole premise behind this blog is that gold is in a nascent bubble, and that it's going to end up in a real one. Every bubble begins with an investment that is significantly overvalued, but trades as if it were undervalued. A cognitive-psychology buff would say that this disjoint introduces a sense of cognitive dissonance.

The explanation gap is resolved by what I call a "New Era story," which explains why traditional fundamental analysis supposedly ignores a significant source of added value. Typically, these stories are just that: narratives that justify persistent and seemingly perpetual overvaluation by standard fundamental measures. Although new accessory metrics are sometimes deployed, their newness and (often) lack of direct connection to the investment itself make then supplemental to the New Era story. At bottom, investors and speculators have only the narrative to go on.

Consequently, momentum trading comes into play. New details in the story, and new computations from those accessory metrics, become grist for momentum plays. The players typically think they're responding to "fundamentals," but the way they do it is consistent with momentum trading. Hence, they're really momentum traders.

The Internet bubble fits this template. Anyone around at the time - not just a market player! - remembers the New Era story: the Internet will change commerce forever. Net-based tech had unimaginable potential to move goods, improve management, co-ordinate product manufacturing and delivery, advertise - you name it, the Internet would improve it. Even Alan Greenspan bought into the Internet-as-transformative meme. For a time, most everyone did.

Actually, that New Era story has panned out. The Internet, along with intranets, has transformed commerce. Amazon and eBay are big business. Virtually every company has an Internet presence. And yes, the old-tech media is still suffering from its effects.

The trouble was, as the New Era story waxed into a New-Era delusion, the transformative effects were exaggerated. The hopes and dreams sometimes translated into fundamentals, but not as much as expected. For many, all that was left were those hopes and dreams. By 2002, those dreams had faded - along with many of the former Internet powerhouses as of 1999.

Nowadays, eBay and Amazon get the same treatment as other growth companies. So does Yahoo. Earthlink panned out, but it now trades like a public utility: it pays a dividend now, and the rate is about 6.5%. Earthlink is now a genuine low P/E, high-yield stock.

In gold's case, I originally fingered "the end of the greenback as a world reserve currency" as the New-Era story. There's another one that's surfaced, and it has to do with investment demand.

Yesterday's "Chart of the Day" at Clusterstock is a histogram of ETF-driven gold demand superimposed on a chart of the gold price itself. Vincent Fernando has this to say about it:
Anyone who thinks gold isn't driven by momentum right now should take a hard look at this chart.

While the chart isn't complete proof, it is at least a strong indication that a substantial part of gold's price rise since 2002 has been due to the birth of exchange traded funds and the new gold demand they created by letting anybody trade gold as easily as a stock....

See, the gold buyers of the past didn't have the hair-trigger trading capability of the present ETF group, and there was a time when gold was considered simply a store of value rather than a vehicle for making huge upside. Which is why some research firms have voiced concern about gold's suspected dependency on fund flows for price support. Note how 2009 ETF-driven gold demand soared. It might be hard for 2010 to repeat this performance, especially if recent investors who are in it for quick returns start to think gold might be boring.
Those words fit the format of a skeptic amazed at the persistent overvaluation of an asset, as measured by tried-and-true norms. So is the warning. So does the research-firm concern Fernando mentioned.

The blog post from which I got Fernando's commentary, "Do ETFs distort the gold market?", has data about the recent outflows from the SPDR Gold Trust:
GLD saw net cash outflows of $937 million during the first two months of 2010, according to the latest data from the National Stock Exchange. The ETF posted inflows of nearly $7.4 billion last year. GLD rose 24% in 2009 as gold prices marched higher on inflation concerns and other worries
Despite that outflow, gold has been basically neutral since its December plummet.

I may be wrong about gold being at the edge of a bubble. If I am, though, then the metal will descend to a level which treats investment demand as a non-essential. It doing so would require an all-out bear market, to about $800-$900. I don't see any sign of that happening.

Nor, though, do I see any driver on the horizon that would push gold into an all-out bubble. The only one that I believe would qualify would be a return to '70s-level inflation. So far, despite whatever's been baked into the cake, there hasn't been any real sign of it.

Note: One sign that high inflation is settling in is the first signs of it being treated as aberrational, particularly by the fixed-income market. The anti-high-inflation case depends upon the bond vigilantes being vigilant. If they decide to take a snooze at the switch, the market pressures will not impel the Fed to do much about it.

Gold Spends Overnight In Trading Range

The Euro has come under some pressure because of worries over EU aid forthcoming to the Grecian government. The latest round in the U.S.-PRC currency spat was played by the U.S. ambassador to mainland China, who urged that PRC officials be "calm" and "rational" about the matter. He also urged de-linking from recent U.S. activities that have affronted some of the PRC leadership, such as selling arms to Taiwan. The PRC has agreed to poll a thousand manufacturers on the effects a rising renminbi would have on their concerns.

Through it all, gold remained in a trading range between $1,120 and $1,125 in the overnight session. Yesterday's closing price didn't hold, but the resultant drop wasn't much of one. The range was briefly broken on the downside near 4 AM ET, with the low of $1,117.80 coming in right at 4:00, but it reversed and the range was restored. More recently, as of about 7 AM, it was broken on the upside. As of 8:11 AM ET, spot gold was at $1,125.40 for a loss of $0.20 on the day. The Kitco Gold Index assigned +$3.80 due to predominant buying and -$4.00 due to strengthening of the greenback.

As indicated above, the U.S. Dollar Index did gain overnight; it was not in a trading range then. After spending some time in a slightly rising channel, it jumped up at 8:40 PM but slid back down into that same channel. Just before 1 AM, it was just below 79.8. Then, it commenced a rise with a jump that carried it above 79.9 within ten minutes. By 4 AM, it was at the 80.1 level. In the next two hours, it pulled back to 79.9 but rose subsequently to around 80. As of 8:20 AM ET, it was right on 80.

A Reuters article pegs the range as established by rising safe-haven demand offsetting the gains in the greenback. The latter was attributed to a statement from the Grecian government expressing lack of hope that aid will be forthcoming from the EU.
Concern over the fiscal health of the debt-laden Mediterranean country has weighed on the euro so far this year, though it has sparked safe-haven flows into gold.

"Gold's short-term correlation (30-day basis) with the euro-dollar declined over the past week...but this can easily reverse," said BNP Paribas analyst Anne-Laure Tremblay.

"This morning, the euro resumed its slide versus the dollar as Germany remains reluctant to provide financial help to Greece and the possibility of recourse to the IMF has once again surfaced."

"In view of euro zone issues, gold, because of its safe haven appeal, has likely seen support as a result," she added.
Another analyst quoted said that gold's held up pretty well, but its overall direction has been neutral.

The morning Bloomberg report, as webbed by Business Week, presents a gloomier interpretation of the greenback's rise.
“The weaker euro has lent further pressure to gold and silver this morning and will continue to provide short-term direction,” James Moore, an analyst at in London, said in a report. While a drop below the 100-day moving average at $1,118 “could trigger additional technical related pressure,” dips will likely find “strong support.”
An example would be the dip that occurred at 4 AM.

The U.S. CPI numbers were released at 8:30, along with the U.S. jobless-claims data. The latter show a drop of 5,000 to 457,000; it was in line with expectations. The raw number from the former was flat; overall, the CPI changed 0.0% in February. That's exactly what economists were expecting, believe it or not. The core CPI, excluding food and energy, went up 0.1%.
In the past year, the CPI has risen 2.1%. The core rate is up 1.3% in the past year, the smallest year-over-year increase in six years
So, there's a little inflation but not that much.

Both the U.S. Dollar Index and gold markets took these data in stride. The Index weakened slightly, falling below 80 but not by much. Its low was above 79.9, and its losses were mostly shaken off within twenty minutes. As of 8:52 AM, it was at 79.97.

Gold rose somewhat on the news. After a pre-announcement handicapping rise of about two dollars, which lost a dollar just before announcement time, gold added $1.50 right at 8:30 but ended up giving it back. No real boost was given by the data. As of 8:55 AM ET, spot gold was in gain territory, but just barely: $1,125.50 for a rise of $0.40 on the day. The Kitco Gold Index assigned +$3.90 for predominant buying and -$3.50 for U.S. dollar strengthening. It could be said that the $1,125 resistance level is now overcome.

Still, the above indicates that today might be a slog day for gold. With no immediate driver on the horizon, the metal might put in another trading-range session.

Wednesday, March 17, 2010

Gold Stalls As Rally Drains Away

Although the overnight action for gold built on yesterday's strong rally, that additional gain vanished when regular trading opened. The lower-than-expected raw wholesale price index figure had an influence, but the main cause seems to be buyers' exhaustion and a pickup in the U.S. dollar.

When regular trading opened, gold was hovering around $1,128. From 8:20 to 9:20, though, the metal entered a three-stage decline that took it down to just above $1,123. The price pulled up to $1,128, but that pullback didn't hold; another decline took hold until 11 AM ET, leaving the price at $1,122. Although there was a rally since then, $1,125 has gone from a support level to a resistance level. The major resistance level, at $1,130, was only breached this morning and only for two unsustainable periods.

As of 11:50 AM, spot gold was at $1124.10 for a loss of $1.80 on the day. The Kitco Gold Index divided the overall loss into $0.40 attributed to predominant selling and $1.40 to a strengthening greenback.

The U.S. Dollar Index did recover, after bumping in to the 79.5 support level early this morning. When regular trading opened, it fluctuated in a gradually rising range centered around 79.7. That range was broken at 11:05, when the Index broke through to almost 79.83 as of 11:11. Since then, it's been trading more indecisively but with an overall rising bias. As of 11:52 AM, the Index was at 79.76.

So far, it's been a somewhat disappointing day but not a wholly unexpected one. Longer-term traders who say "call me when it stays above $1,140" have a point.

As of now, it's be something if the metal gets and stays above $1,125 again. The afternoon will show if it's achieved.

Update: It hasn't been so far, even though the U.S. Dollar Index took a large dip recently. After spending the last hour of the morning in a trading range bordered by $1,123.75 and $1,125, gold dipped below and then lifted above it. Right after 12:30, though, the price took a dive down to $1,120.60. Although that dive was mostly recovered from, the metal was still below $1,125. As of 1:42 PM ET, spot gold was at $1,124.90 for a loss of $1.00 on the day. The Kitco Gold Index assigned -$3.10 to predominant selling and +$2.10 to a weakening greenback.

The U.S. Dollar Index did take a fall, as mentioned above; in fact, it's been falling since 11:37 AM. The decline wasn't uninterrupted, but it was a fairly smooth ride downwards. As of 1:44 PM ET, the Index was at 79.52.

Again, resistance popped up at $1,125 for gold. The rest of the day will show whether or not it prevails.

Update 2: $1,125 did prevail; the gains at the beginning of the day melted into a slight closing loss.

After spending an hour and a half around the $1,124 level, which ended at 2:30 PM ET, gold went into a two-stage decline interrupted by another rest period. By 3:40, the metal had sunk to $1,117.50. The price snapped back to the $1,120 level, though, and continued along there until just before 5:00. A closing rally, normally unusual for the metal, pushed it all the way up to $1,125 where it stopped. As of the clsoe of regular trading, spot gold was at $1,125.10 for a loss of $0.80 on the day. The Kitco Gold Index divvied up the loss into -$0.10 for predominant selling and -$0.70 for strengthening of the greenback.

The U.S. Dollar Index wasn't all that strong earlier this afternoon. It bumped against the 79.5 resistance level just before 2:00, but pulled up afterwards. It was almost at 79.75 by 3:40, making a counterpoint to the mid-afternoon gold decline. For the rest of the session, the Index drifted in a range between 79.7 and 79.75. As of 5:30 PM ET, it was at 79.725.

The daily chart (from shows the 79.5 support level, and the extent to which February's gains have been erased:

In hindsight, the Eurocrisis proved to be more climax than driver; the fact that the Index didn't shoot up during it was a warning sign that its recent bull run wasn't very substantial. (Of course, hindsight is 20/20.) It closed today at almost exactly the same level it was at as of February 9th's, which makes for a less-than-pretty picture for greenback bulls.

Still, 79.5 has held - and the decline that's matched the most recent bear cross in the MACD lines at the bottom hasn't been all that much. The slog upwards has been met by a slog downwards, suggesting that any further fall isn't going to be that great in extent.

One item of note that pertains to the Euro component: last Friday's Committment of Traders report shows that, as of eight days ago, there was a new record high in non-commercial shorting of the Euro. Given how it's performed since, a short squeeze isn't out of the cards; it may already be happening. At any rate, the non-commercials are back in the shorn-sheep category.

Turning to gold: the daily chart, which uses the nearest futures month and whose close is recorded when pit trading ends at 1:30 PM, shows a more extensive decline than the one recorded above:

$1,120 did hold as a near-term support level, but today's result means that the advance lasted only two days. There's a case to be made that today's decline was the result of the metal going too far, too fast yesterday. [See the comments.]

Gold resuming its uptrend tomorrow would be great, but it seems too much to be asked for at this point. Again, the overall chart doesn't give a commenter/prognosticator much to chew on regarding near-term action - and won't unless $1,140 is broken on the upside or a decline emerges in earnest.

A Wall Street Journal report ties with in the too-far-too-fast explanation:

Participants were thinking prices are high enough for the moment after the previous session's marked gains, said Patrick Donnelly, a senior market strategist at Olympus Futures.

The metal was having trouble at resistance at the $1,130 area, he said.
Also, according to another source cited in the article, the decline in the greenback was met with a little skepticism.

It was a day where people were waiting for another shoe to drop; it might tomorrow. The pullback was fairly restrained, all things considered, and tomorrow might see another rally attempt that breaks well above $1,125. We'll see.

It Had To Happen...

There's now a Google Earth map tool that shows where gold has been found before, which'll aid exploration efforts. One of the standard tricks in the exploration business is to stake or buy claims beside ones that contain either a gold mine, or a sizable resource that looks destined for a mine, in the hope that the ore body on the producer/successful explorer's property will extend beyond their claim bed.

Over at British Columbia's Mineral Titles Online, it's possible to 'stake' a claim electronically now, although you have to get a Free Miner Certificate from the Ministry of Mines in person before they'll let you. The Province of Ontario has documents that pertain to earlier exploration work on Ontario claims scanned electronically; so does B.C. to a lesser extent.

Geeky this forecast may be, but the day of convergence is not far off. Someday, perhaps someday soon, it'll be possible to do basic pre-exploration research and register a property of claims right from a computer in the basement...

Dehedging And Its Significance

Geena Paul of Commodity Online says that gold de-hedging has become quite the trend; gold producers are more willing to shoulder the risk of fluctuating gold prices now. Many of them who hedged more than, say, 10% of their annual production wound up hurting in consequence. That hurt has been the prime mover behind the dehedging trend. She opines that a moderate amount of hedging will come into play in the future, but not now.

Diehard contrarians are willing to take the opposite side of anyone, especially if someone has made a recent goof. Barrick closing its hedge book at the peak of the market on December 2nd qualifies as making such a goof.

I refrain from taking that step, but some might. A caveat: despite Barrick's embarrassment, gold-producer executives know the gold market fairly thoroughly.

Russian Gold Production Increases By 11.2% In 2009

Perhaps the peak-gold case is too focused upon the declines in South Africa. Another counter-example to it has shown up in 2009 production figures for Russia. According to Commodity Online,
Russia produced around 11.2 per cent more gold in 2009 than the previous year.

According to reports, Russia’s yellow metal output soared by 11.2 per cent in 2009 to 205.2 tonnes.

Russia’s Chukotka autonomous region, as well as regions of Kamchatka, Amur, Sverdlovsk, Irkutsk and Buryatia mainly contributed to the increase.

The global recession had helped Russia’s gold mining industry, lowering production costs as small companies were absorbed by larger ones. Last year’s rocketing gold prices had also made marginal projects more profitable....

It looks like the old saw about high prices being the cure for high prices still has some applicability to the gold market. That being said, the peak-gold case is impugned by such production figures but not refuted entirely. Should high prices disappear, they'll no longer cover up any long-term decline in production rates.

Gold Makes USA Today Again, But In Thr Hands Of A Skeptic

Matt Krantz doesn't think much of gold as an investment, but he still took a question about gold ETFs for his "Ask Matt" column. That says something about the spread of the gold-as-hedge-asset meme.

To his credit, he's polite about his own opinions, and adds the case for gold in his answer:
Gold is the favorite asset for nervous people trying to preserve their wealth. Since gold is a metal that's been considered to have value for centuries, it's a typical fall back when the economy is looking scary.

Gold bugs point out that the yellow metal is almost the perfect asset no matter what you're worried about. Worried that the government's deficits will result in runaway inflation? No problem. Gold, in theory at least, works for that. Fearful the dollar might lose its position as the world's default currency? Again, gold works. In fact, moves in the value of the dollar has been a bigger driver behind the price of gold, according to an analysis cited by USA TODAY's John Waggoner here.

As Waggoner points out, if you're really worried the value of the dollar will contract, even though the currency's value has been rising this year, then maybe 5% of your portfolio in gold might make sense....

It could be respect for his colleague, though.

Indian Gold Demand Tails Off

That's according to a Reuters India report that says retail buying slumped because of two reasons: festival buying is dwindling and the price is too high right now.
India gold demand retreated on Wednesday afternoon as prices touched a one-week high on the back of festival-related buying, traders said.

This was a reversal of the buying by stockists seen in the previous two sessions as they prepared for the upcoming wedding season, they added.
Wedding-related demand will be given a boost by a lowered price, particularly a price below $1,100.

It's the same figure that's been mentioned for some time. It's not very relevant now, but it should cushion any declines below that level unless they're sudden.

Gold Gets Above $1,130, Falls Back

The reflationary efforts continue. The Bank of England board agreed unanimously to leave the BoE rate at 0.5%, while the board of the Bank of Japan agreed to keep its policy rate at 0.1% and authorize another 10 trillion yen for loans at that rate. The expansion of its own quantitative-easing program wasn't without controversy, though, as two of the seven board members voted against.

Gold spent all of last night and the beginning of this morning's trading (ET) in a range between $1,125 and $1,130. That range was broken on the upside as of 3 AM, with the price shooting up to $1,134.40 before pulling back. After a two-hour spell at just below $1,130, the metal surmounted that level again at 6 AM. Hanging around $1,132 for another hour, it took a spill below. As of 8:07 AM ET, spot gold was at $1,127.50 for a gain of $1.60 on the day. The Kitco Gold Index divided the gain into $1.60 for predominant buying and $0.00 for the greenback.

The U.S. Dollar Index was all-but flat for all of last night. The fluctuations intensified as night tunred into morning: as of midnight, the Index was just above 79.65. The next two and a half hours saw a run-up above 79.7, followed by a quick spill that ended as of 3:20 AM at just above 79.5. The fluctuations continued in a range bordered by about 79.55 on the downside and 79.75 on the upside. As of 8:18 AM ET, the Index was at 79.66.

A Wall Street Journal article says that the Bank of Japan's decision, although not unanimous, gave a lift to the metal:
Gold shot higher late Tuesday in the lead up to the U.S. Federal Reserve's rate-setting committee meeting. After the group left rates unchanged as expected the metal climbed further, tipping above $1,130 a troy ounce.

Sentiment got a further boost Wednesday following an announcement in Japan of further monetary easing.
Buying physical at recently-made lower levels have added to the boost.

Echoes of yesterday's Fed decision was cited as the cause by a Bloomberg article webbed by Business Week, due to its effect on the U.S. dollar.
“The stronger euro has given the metal a boost,” James Moore, an analyst at in London, said in a report. Gold prices “are poised to exit their current phase of consolidation and regain bullish direction as speculators and investors continue to diversify away from fiat currencies.”
His underlying optimism was shared by Goldman Sachs analysts: a report issued from that firm forecasts that gold will be at $1,390 twelve months hence.

A Reuters report webbed by Business Day also attributed the rise to the Fed's decision to stay the course and currency effects:
“As soon as the euro-dollar started moved towards $1,38, we saw currency factors,” said Nick Moore, head of commodity strategy at RBS Global Banking & Markets.

“Gold’s inverse relationship with the dollar is such a powerful (influence) that most moves in gold on a daily basis can be explained by currencies.”
The same strategist also mentioned that rate hikes make gold less competitive an asset class, from which it has been spared so far.

The producer-price index numbers were released at 8:30 AM, and the base rate showed a larger-than-expected drop of 0.6%; the expected drop was 0.2%. A big decline in energy costs explains the overall drop; the core PPI, with food and energy excluded, rose 0.1%. For that number, a drop of 0.1% was expected.

Gold was already falling as of the release, but its decline was amplified by the PPI number. After bouncing between $1,127 and $1,129 when regular trading opened, gold dropped to $1,126 just before the number was released. Spiking up at release time, it continued to drop down to $1,123.30 before recovering somewhat. As of 8:53 AM ET, the day's gain had turned into a loss: spot gold was at $1,125.70 for a drop of $0.50 on the day. The Kitco Gold Index apportioned the loss into -$0.20 due to predominant selling and -$0.30 due to strength in the greenback. The U.S. Dollar Index took a liking to the news after five minutes of hesitation, rising ten basis points from 8:35 to 8:46. As of 8:56 AM ET, subsequent to a pullback, it was at 79.68.

$1,125 may be support instead of resistance right now, but gold's still having a tough time getting above $1,130. Today's action may well see a stall instead of a continuation.

Tuesday, March 16, 2010

Gold Shoots Up But Is Blocked At The $1,125 Level

Except for the lower base, it's as if last week never happened. A three-dollar rally at 8:30 AM ET proved to be the first of three stages in a leap that took gold up to $1,126. The second stage saw the metal zip up six dollars an ounce right at 9:00. Since the end of the leap, the metal's been fluctuating in a range bordered by that same $1,126 on the upside and $1,122 on the downside. The gain, although currently blocked, has been solid. As of 11:45 AM ET, spot gold was at $1,125.10 for a gain of $16.30 on the day. The Kitco Gold Index apportioned the gain into $10.70 for predominant buying and $5.60 for a weakening greenback.

The U.S. Dollar Index has dropped below 80 in the same timeframe, although not by much. Starting above 80.05 as of 8:30 AM, it slowly drifted downwards until 11 AM, at which point it sunk below 79.8. Since then, it's pulled up a bit. As of 11:47 AM, it was at 79.82.

Since there wasn't a pullback in the Index, gold's rise this morning is primarily due to other factors. As far as I can tell, it seems to be handicapping a steady Fed.

If so, then an impetus for a further rise in the afternoon session isn't likely to be there. Should the Fed stop using "extended period" in this afternoon's policy statement, the ride'll get a little rough.

Update: On the brink of the latest Fed announcement, gold has gone quiet. An attempt to rally above $1,226, as of 12:10, came to naught as the advance turned into a spike. Still, gold hasn't gone down all that much. The bottom of the $1,222-$1,226 trading range held between 12:45 and 1:30. As of 1:58 PM ET, spot gold was at $1,122.90 for a gain of $14.10 on the day. The Kitco Gold Index split the gain into $10.10 for predominant buying and $4.00 for greenback weakness.

The U.S. Dollar Index reversed its morning decline somewhat after that initial upturn mentioned above. After falling back down and making a double bottom, the Index rose steadily from just after noon. From the 79.75 level it reached 79.90 and above; as of 1:59 PM ET, it was at 79.93. An earlier influence on its drop was S&P removing Grecian sovereign debt from its downgrade watch.

That item may have influenced gold too, upwards, despite it being inconsistent with the safe-haven trade. As far as the greater potential influence of the Fed is concerned, both markets are saying that there'll be no changes or surprises.

Update 1a: Nothing did change. The Fed didn't raise anything and is still using "extended period". The gold price was a little above what it had been, but not by much: $1,126.20 as of 2:28. The U.S. Dollar Index fell, but only momentarily; a little later, it traded in a range centered around 79.8 or so.

Update 2: Regarding the Fed's steadfastedness, the gold market decided that no news was on balance good news. The metal made a valiant try to break above the $1,126 resistance level, but failed to in the end. Still, it was close.

After the Fed announcement, gold spurted up to $1,125 but fell back again to $1,122.50. Then, it leapt up to $1,126 but again pulled back. The third attempt stuck: as of 2:40 PM ET, gold rose from $1,124 all the way up to $1,130.20 as of 3:45. Thereafter, it pulled back, recovered partially, and drifted around $1,128. There it stayed until 5:00, at which point it fell to reach its close. At the end of regular trading, spot gold was at $1,125.90 for a gain of $17.10 on the day. The Kitco Gold Index had the gain apportioned between +$9.60 due to predominant buying and +$7.50 for a weakened greenback.

The U.S. Dollar Index didn't fare all that well during the rest of the afternoon. It was drifting up slightly before the Fed announcement, which it didn't take well to. From 79.94, it dropped to below 79.7 within five minutes of the release. A partial recovery didn't last; by 4 PM, it was well below 79.65, supplying the impetus for gold to rise above its $1,126 resistance level. It drifted up to almost 79.75 in the next hour, but drifted down from 5:00 to 5:30. As of the latter time, it was at 79.66.

Its daily chart shows yesterday's candlestick pair has become a triple:

As I noted yesterday, a pattern heralding a short-term gain the last time it showed did not mean that consequence would repeat this time 'round. Such was the case today. The doubling formed by Friday's and yesterday's action did not lead to a further upturn; instead, yesterday's jump now looks like a relief rally that's passed.

Of note is the RSI line at the top and the MACD lines on the bottom. The former has dipped to below 50; it's either at or below the lowest level since the bull run began early last December. The MACD lines are in a bearish formation: the black line is below the red line. This negativity is indicated by the histogram underneath both. Also of interest: back when they were nearly superimposed upon each other, in mid-late February, the Index pulled back. Previously, in the past few years, such a pattern had been preceded by a rise.

I note, though, that the moving averages in the middle are still in a bullish formation. The 50-day, in blue, is above the 200-day, in red. The latter is no longer falling. The Index's value is still above both.

The Senate bill unveiled to apply sanctions on the PRC for "currency manipulation" gives a fundamental reason behind today's drop. Although the renminbi's value doesn't affect the Index's, that bill sends a message that an angry Senate wants something done about the U.S. trade balance. One easy way to boost exports would be to let the greenback fall, if not push it down. A provision therein instructs Treasury to consult with the Federal Reserve to discuss revaluing (meaning, devaluing) the U.S. dollar as a retaliatory measure if any other nation's currency is found to have been manipulated, and nothing is done about it by that nation's government within 90 days. It's only one of several, but including it sends the message.

So far, this bill is only a warning shot across the bow. Combined with the healing (or dormancy) of the Eurocrisis, though, the potentiality of greenback devaluation is hitting the forex markets. As of this point, there's no way of telling how far it wil go.

That downward pressure gave a boost to gold. As gold's daily chart shows, yesterday's hesitant rally proved to be a primer for today's much stronger one:

No longer is $1,100 the worry. Now, it's $1,125 that's the hope. As the chart shows, the last downturn ended above the previous one in late February. Not enough to bring comfort, but a little above. I have to note, though, that a turnaround decline below $1,140 would bring it into question. The best hope for gold right now, other than a continuation of Eurocrisis-related buying, is a further fall in the greenback.

If Friday's climax be the bottom, however, then we're looking at a different picture. I can't hold out hope, but a close well above $1,140 would look definitely bullish. The only demur I have to add is that a turn of the wind seems only possible if there's a turn in the tide for the U.S. Dollar index - to bearish.

I don't want to pile up too much speculation on that Senate bill, but driving the U.S. dollar down would hit PRC reserves where it hurts: in the value of PRC-owned Treasury securities. I don't know how far things will go, but it's an additional talking point in favor of the Fed "doing something" about the export situation by devaluatory currency intervention. If the forex market takes to the message, any Fed actoin might be superfluous.

Time will tell; the game at this stage will likely end in brinksmanship. If the bill passes, then the PRC may just let the renminbi float upwards a little until the storm passes. That bill, if it become law in its present form, authorizes no action if the offending nation takes steps to upvalue its currency within 60 days of it being found a currency manipulator. The Fed may well do nothing to the foreign-exchange market, and the market itself may calm down and get back to the old track. Given the way the Index is performing, that likely means a time for churning.

Tomorrow will reveal the next turn of the worm...if any.

A Cautionary Tale Worth Reading

It's about exciting E-mails containing hot tips in gold stocks. Brad Ziglar of received one about Guinness Exploration, whose price action was nice on the day he received it. But, a double check using its "money flow" - an indicator that multiplies volume by price change and keeps a running total - showed that money was on balance exiting from the stock. That tipped Ziglar off about some softness in the rally. As the first graph of his Seeking Alpha article shows, the price of Guinness did decline subsequently.

On the other hand, the money-flow tally shows higher highs and higher lows for the SPDR Gold trust (GLD.)

It isn't always easy to ignore E-mails with hot tips, but Ziglar has shown a metric that can be used as an aid in doing so. Of course, the "delete" button works too....

Handicapping The Telegraphing

The consensus expectation for the telegraphing of a future Fed Funds rate hike, according to a Marketwatch report webbed by Yahoo! Finance, is April. Next month, according to that handicapping, the Fed's releases will no longer use the term "extended period" for its zero-interest-rate policy.
Continued positive economic data may serve as the catalyst for Fed officials to end the "extended period" pledge in April, Fed watchers said.

Altering the wording would be a clear signal that the Fed is more sanguine about the economic outlook and believes ultra-low rates are no longer necessary -- and financial markets would react accordingly.

For the time being, however, the Federal Open Market Committee "will stay the course" and not make significant changes to the wording of the statement, economists at Barclays Capital said.

We'll see at 2:15 PM...

Brian Bloom Defends Claim Of No Manipulation Of The Gold Market

In a Market Oracle article, Brian Bloom explains why he thinks the Fed is not manipulating the gold price:
The reason that I think the gold price is not being managed at this point is that I think the central banks have run out of wriggle room....

As the saying goes: The spirit is willing but the flesh is weak. I believe we may be close to capitulation by the Fed in this mega game of chicken....
His argument amounts to noting an inability of the Fed to control the bond market, no matter how much it would like to. There's too much money in bonds for direct manipulation to succeed, and for there to be any interest-rate benefit to suppressing the gold price.

Central to his argument is the hidden claim that bond buyers don't consider gold significant when making decisions on inflation expectations. If not, then there's no point in any manipulation of the gold price.

One Implication Of The Expected M&A Boom In The Gold Sector

The need for confidentiality agreements, according to a Australian lawyer:
"Gold owners need to ensure that the information they are about to share is presented so as to minimise the risk that it will be used by others for their commercial advantage," Minter Ellison senior associate Stephanie Rowland told a conference in Perth on Tuesday.

A sign that the call for an M&A boom in 2010 is being taken seriously...

Indian Retail Gold Buying Strong As Prices Stay Steady

According to a Google India report, gold buying at the retail end continues to be fairly good:
India's retail gold buying continued on Tuesday afternoon as prices stayed in the vicinity of their recent lows, prompting consumers to buy for a local festival, traders said.

"Yesterday we saw good showroom sales especially on the coins front, and there were some buyers in the morning as well, and expected to increase by evening, when the auspicious time starts," said Ghanshyam Nichani, properietor of Mumbai-based Dhanraj Jewellers.
However, the high price of gold is prompting consumers to buy lighter pieces rather than heavy bridal sets.

An Interesting Metric

Come up with by Dundee Securities analyst Paul Burchell, it calcluates the stock price over net asset value per share. Burchell looked at the price to NAV multiple for six senior and intermediate gold stocks and found that the value for most of the companies normally fluctuates in a fairly narrow range. Every now and then, though, the value deviates enough to make for a buy or sell signal. According to his research, as passed on by Jonathan Ratner of the Financial Post:
Barrick Gold Corp., Goldcorp Inc. and Agnico-Eagle Mines Ltd. are currently trading at the lower end of the P/NAV range and may offer better returns at this time, the analyst said in a research note. Kinross Gold Corp., IAMGOLD Corp. and Eldorado Gold Corp. are trading closer to the mid-point of their P/NAV ranges, which suggests lower, but still potentially positive, returns.

For gold stocks, this approach is fundamentally-driven analysis. A gold stock isn't a closed-end fund, for which discount-to-NAV analysis is a better theoretical fit, but it does yield a kind of intrinsic value for a mining company. Earnings of those companies tend to fluctuate too much for standard funadmental analysis to do the trick.

Gold Rises Overnight, This Time Helped By Falling Greenback

A higher-than-expected reading from Germany's ZEW Institute Sentiment Index helped push the Euro up, leading to the U.S. Dollar Index sinking in overnight trading. Moody's is continuing to warn about the sovereign debt of certain sovereign nations, particularly the United States: the latest missive warns them to cut spending or risk losing their AAA credit ratings. The Fed meeting takes place today, and the gold market may be handicapping a stay-the-course decision.

Gold rose steadily, although intermittently, overnight. The metal took a dip right around 7 PM ET last night, when Sydney trading opened, but that dip reversed itself; gold stayed in a trading range bordered by $1,108-$1,110 until 11:30 PM. Then, it rose to a more raggedy range that was centered around $1,112. It didn't break out of this formation until it touched $1,114 at 6 AM. Its rise from that point was hesitant, and didn't last. As of 8:02 AM ET, spot gold was at $1,112.90 for a rise of $4.10 on the day. The Kitco Gold Index divvied up the rise into $2.70 due to a weakening greenback and $1.40 due to predominant buying.

The U.S. Dollar Index spent most of the night sliding. An attenpt to rally between 7:10 and 7:40 came to naught. As night turned into morning, a trading range was established between 80.065 and 80.13 that was broken by a rally starting just before 3 AM. It lasted for about forty-five minutes, taking the Index up to 80.315. After some hesitation, it slid downwards in three bursts that took the Index well below where it was as of midnight. At 8:17 AM ET, the Index was at 80.06.

A Wall Street Journal article starts off with a mention of the upcoming Fed meeting, and then explains why gold has been rising lately:
The precious metal has decoupled somewhat from its correlation with the U.S. dollar in recent days and is being supported by a combination of physical buying, technical trading and a feeling of renewed risks in the broader market.

However, traders and analysts said the metal will likely stay in a tight range for now with many investors sitting out of the market.
However, traders expect gold to stay in a trading range between $1,090 and $1,140 at relatively low volumes as it's still hobbled by the strong U.S. dollar and relatively weak investment demand.

The morning Bloomberg article, as webbed by Business Week, points to EU talks concerning indirect aid to Greece.
European officials worked out a strategy for emergency loans in case Greece’s plan for 4.8 billion euros ($6.6 billion) in tax increases and wage cuts isn’t enough, without giving precise details....

“There is still concern about the euro policies,” said Bernard Sin, the head of currency and metals trading at bullion- refiner MKS Finance SA in Geneva. “There’s some physical demand at $1,100 an ounce that’s been supporting the market.”
Also mentioned is why plantinum has moved into the spotlight that used to be occupied by gold: the industrial component of the demand for the former is stronger, and is expected to benefit more from global recovery.

Worries about sovereign debt and and future inflation helped push gold up in an atmosphere of declining risk appetite overall, according to a Reuters article webbed by the Globe and Mail.
Société Générale analyst David Wilson said the safe-haven appeal of gold was starting to come into play again, as the metal benefited from a flight to quality among investors.

“The combination of nervousness of debt and inflation is benefiting gold,” he said....

Commerzbank analyst Eugen Weinberg said the increased focus on growing government debt piles was underpinning interest in gold.

“It is helping the market because, if you are looking for security, you buy gold,” he said.
Amongst other factors, it brought up the growing trade row between the U.S. and the PRC over the renminbi peg to the U.S. dollar.

As regular trading opened, gold took off. Hovering around $1,113 until 8:30, gold got a boost from the release of the housing-construction number in the U.S.: for February, it dropped 5.9% to 575,000 units due to severe weather. January's figure was revised upwards, adding to the percentage drop for February. Gold added more than three dollars an ounce in ten minutes. As of 8:54 AM ET, the spot price was $1,116.60 for a gain of $7.80 on the day. The Kitco Gold Index attributed $2.80 to a weakened greenback and $5.00 to predominant buying. The U.S. Dollar Index was little affected by the news, but was down all the same; as of 8:57, it was at 80.

Gold's off to a good start. Whether or not it has a good finish will be seen over the course of the day.

Monday, March 15, 2010

Gold Closes Well Above $1,100

It wasn't hard to find the reason why gold pulled back from an early morning advance and started slogging along: the U.S. Dollar Index rose well above 80 and even above 80.25.

After fluctuating between $1,105 and $1,107 until just after 9 AM, spot gold dropped to $1,104. It spent some time around that level until 9:45, when it made a run that carried the price up to almost $1,108. A quick double top ensued which was followed by an interrupted drop that carried the metal down to $1,104 again. Around 11:15, another decline erupted; this one took gold down to $1,100.50 quickly. This one, like the last ones, didn't serve as a plummet catalyst; gold recovered somewhat. As of 11:50 AM ET, spot gold was at $1,103.40 for a gain of $1.90 since Friday's close. The Kitco Gold Index attributed an $8.90 gain to predominant buying and a $7.00 drop due to a strengthening greenback. The two figures, of course, add up to the overall gain.

The U.S. Dollar Index is indeed pulling up. After bumping up against the 80.15 level near the start of regular trading, it broke through at 10 and skipped up to 80.19. After a slight pullback, it rose all the way to 80.355 as of 11:19 before pulling back once again. As of 11:52 AM ET, it was at 80.30.

Despite the downward push that the greenback has given gold, the metal is still holding at over $1,100. That support level might be tested later today, but it still looks solid.

Update: Gold hasn't declined further from that level; in fact, it's pulled back up.

After another spill just after noon ET, to about $1,101.50, the price recovered to almost $1,106 before pulling back somewhat. Another spill between 1:10 and 1:15 was completely reversed, and gold went back up to the $1,105 level. As of 1:41 PM, the spot price was at $1,106.20 for a gain of $4.70. The Kitco Gold Index assigned an $11.50 gain due to predominant buying and $6.80 loss due to greenback strength.

That strength has ebbed, but has not been replaced by a decline worth mentioning. The U.S. Dollar Index has essentially gone nowhere. After a push up to 80.39 just before noon, the Index slowly slid back to 80.3, where it all-but halted. As of 1:43 PM ET, it was at almost where it was as of the time given in the original post: 80.29.

$1,100 is holding. Unless there's a nasty surprise sometime in the later afternoon, it will continue to hold. The chances are good that gold will close with a daily gain.

Update 2: It not only closed with a daily gain, but it also gained in the afternoon session. For the first time in six sessions, there's a sense of a real pickup.

Gold spent the rest of the afternoon climbing, not too quickly but steadily. A jump to $1,107 started at 1:15 PM ET and ended at 1:45; after dawdling at the $1,107 level, the metal took a dive to $1,105.50. Ending at 2:10, the dive was replaced by a steady climb upwards 'til the end of regular trading. At the close, spot gold was at $1,108.80 for a gain of $7.30 since the end of last week. The Kitco Gold Index chalked up a rather high +$13.50 due to predominant buying, and -$6.20 due to strength in the greenback.

That strength lessened as the afternoon wore on. Starting from 1 PM and lasting for a little more than three hours, the U.S. Dollar Index gently slid down; as of 4:10, it was at just above 80.2. Since then, it bobbed in a trading range that ramped up slightly near the close. As of 5:30 PM, the Index was at 80.225.

The daily chart (from shows an unusual pattern over the last two trading days, one that was on the chart relatively recently:

The pattern I refer to, in the rightmost part of the action, is two candlesticks side by side: one red, the other white. The last time the same pattern was there, was February 16th and 17th. What followed back then was a two-day upwards jolt; once over, and once a compensatory decline had set in, the Index was still higher than it was on those two days.

There's far from a guarantee that the same result will follow from Friday and today's version of the same pattern. However, a run up to 80.5 shouldn't be dismissed out of hand. The Fed meeting tomorrow may contain publicly-released remarks that foster a higher greenback.

As for gold, its daily chart shows that last week's decline has been definitely interrupted:

Given the above-noted strength in predominant (or ex-dollar) buying noted above, there's some grounds to believe that the worm is turning. The strength seems supplied by a little more than bargain-hunting; the sovereign-risk meme seems to be spreading. If gold contunues to go up, which it may not, the $1,120 level is the one to watch. If the metal tries and fails to close above it, and turns back down to $1,100, that support level is at risk of being breached. At the least, a pullback of that sort would make some gold longs nervous (and tighten their stops.)

The hedge-against-sovereign-risk theme is referred to as "alternate currency" in a Wall Street Journal report, which notes its attractiveness despite lower risk appetite and the strengthened greenback:

A firmer U.S. dollar would typically weaken the metal by making dollar denominated gold more expensive for buyers using other currencies. Also, gold has been trading inversely to the greenback as a risk play along with equities, other commodities and higher yielding currencies in recent months.

But on Monday, the metal found support from one of its historical roles as an alternative currency. Gold is often seen as an alternative to paper money because it doesn't have counterparty risk and because it is physically deliverable and portable.

"Right now there doesn't appear anywhere safe," says Michael Gross, broker and futures analyst with "There's some flight-to-quality issues going on in gold ... which is always going to be its own currency."
Gross is also noted as saying that gold is benefitting along with the U.S. dollar by safe-haven buying. Another analyst said that the flight-to-safety component is particularly strong for European buyers.

Today's rally may only be a relief rally, but it can definitely be called a relief. How durable it is, though, is still an open question. The rest of this week's trading will supply the answer, particularly tomorrow's.

Tips On How To Protect Yourself From The Tungsten Scam

Recently, there have surfaced a few bars that proved to be gold-plated tungsten instead of gold. Over at, Mark Nestmann has this tip to prevent being taken: buying physical gold in small amounts, particularly in bullion-coin form. Unlike a bar, a coin is small enough to make it a lesser target for counterfeiters. More importantly, a coin can be subjected to a "ring test." The ring given off by a gold-plated tungsten coin is different from that given off by a real gold coin.

He also has a counterfeit-related tip for those who want to buy stored gold:
Also be aware of the differences between "allocated" and "unallocated" storage of gold. Allocated storage means that a bank or warehouse has specific coins or bars that you own set aside. Unallocated storage means that you have an ownership interest in a gold pool. Unallocated storage is therefore less expensive and a preferred storage option for many investors.

However, if a bank or warehouse has counterfeits in its unallocated inventory, it could potentially default on deliveries. That would almost certainly lead to its bankruptcy. You would then become an unsecured creditor and apply to the bankruptcy trustee for relief.

A Telegraph Report On An Investment Idea Whose Time Has Come

The investment class is commodity ETFs, of which gold is one. These ETFs are presented as a convenient and lower-risk means of investing in commodities, which previously required buying shares in commodity-related companies or futures contracts.
"Until recently, the market for commodities investment has been largely restricted to sophisticated investors," said Zak Cherkaoui, commodity index structurer at UBS. "A broader investor base in the UK will now be able to gain exposure to the commodities market in an efficient and effective way using the LSE regulated and traded UBS ETC product."

There is now a record amount of cash – €23bn (£21bn) – in exchange-traded commodity products and last year saw net inflows in all six commodity sectors of agriculture, broad indices, energy, industrial metals, livestock and precious metals, totalling €9.7bn – or €800m per month.
The article notes, however, that gold's share of all commodity ETF investment has been dropping of late. The expected hot areas of ETF investing are non-precious metals, spurred by demand from mainland China, and commodity index funds.

Latest Spread Of The Gold Meme: Global Pensions

Gold as an alterative investment got a write-up in Global Pensions Online, with this selling point:
“If you look at the investment markets between 2000 and 2007 then markets were great,” said World Gold Council managing director – investment, Jason Toussaint. “We had risky assets like emerging markets making big returns and this lulled investors into a false sense of security as they thought this would continue. When the downturn came in 2008 investors realised that what they thought were diversified portfolios actually weren’t. Despite these issues gold was still one of the few positively generating asset classes in 2008 and so its role as a portfolio diversifier is key
Although pension funds in general are only tiptoeing in, the Teacher Retirement System of Texas has launched the Global Best Ideas (GBI) Gold Fund, which secured about $250 million's worth of assets. That fund invests in mining stocks as well as gold itself.

The article does contain a cautionary balancing quote which notes gold's expensiveness right now, but it does make a case for gold as a hedging asset. The above-quoted selling point has a resonance that might well see it spread further.

Indian Gold Buying Still Strengthening

Although influenced by the wedding season and an upcoming festival, gold demand by dealers is also strengthening because prices have fallen back:
"I did normal deals today at around $1,105-1,107 (an ounce), even Friday was good, when we sold about 100 kgs at 1,100-1,105 levels," said a dealer from a state-run bullion dealing bank....

"A lot of orders are there at about $1,090 (an ounce)," said another dealer with a state-run bank. However a weak rupee, which makes the dollar-quoted asset expensive, weighed on sentiment. The Indian rupee weakened, weighed down by gains in the dollar against major currencies and losses in the local sharemarket.

Bargain-hunting does seem to be kicking in; the acclimatization to $1,100 as a low price is still there.

Gold's Hidden Strength, As Revealed In Othe Currencies

That strength has ebbed recently, but it has been evident in Euros and pounds. The reason why, according to a Reuters report webbed by the Economic Times, is because sovereign risk is influencing the gold market. The huge debts that govenments have piled up are being handicapped as inflationary. Therein is an interesting fact about gold's corrlation with the U.S. dollar:
Usually the euro's decline versus the dollar would drag gold lower, but that relationship has weakened.

Using 1 as a perfect correlation and -1 as an inverse correlation, the traditionally strong link between gold and the euro-dollar exchange rate fell from 0.9 in early February to as low as -0.2 a month later, according to Reuters data.
The article also quotes a few gold bulls to the effect that currencies are locked into a race to the bottom.

Gold Starts Off Week With A Yawn

Despite crude oil prices falling and the greenback rising, gold didn't changed all that much in overnight trading; the $1,100 support level wasn't broached. When the week's trading began last evening, gold rose slowly but didn't get up above $1,105 until night had turned into morning (ET). After spending the first two hours of the morning stuck at $1,105, the price rose above it only to fluctuate around it until 5 AM ET. A drop down to $1,102.10 was mostly reversed, and gold spent more than an hour at $1,104. Then, at 7 AM ET, it made a run all the way up to $1,109.30, but fell back somewhat since. As of 7:57 AM, spot gold was at $1,105.70 for a gain of $4.20 since Friday's close. The Kitco Gold Index attributed a $7.95 gain for predominant buying and a $3.75 loss for strengthening in the greenback.

The U.S. Dollar Index started gaining last night, and added to it after an early-morning slump. A run from 8 PM to just before midnight took the Index from 79.7 to almost 80. A subsequent trading range turned into a drop to just below 79.85 by 3:30 AM. Then, it rallied all the way above 80.15 before falling to 80.05. A slight recovery put the Index at 80.08 as of 8:12 AM ET.

A Reuters report centers around a rumour that the gold market didn't take a liking to: the proposed EMF being funded by some of the Eurozone member's gold reserves.
German magazine Focus reported on Saturday that the finance ministry was considering the possibility of euro zone countries using their central banks' gold reserves to back such a fund. "A proposal from the finance ministry suggests pooling the gold reserves of the former central banks of euro zone countries in a
stabilisation fund," Focus wrote.

"Gold prices are likely to be capped in the near term with worries about European central banks selling gold to help Europe's fiscal problems," said Kazuhiko Saito, chief analyst at Tokyo's Fujitomi Co Ltd.
Also mentioned in the report is the overall caution that's crept in to the gold market, prompted by Asian bargin-hunting buyers turning into scalpers and anxiety over central bank meetings this week.

Another story, and a forecast, headed up a Bloomberg report webbed by Business Week: Moody's warning about the U.S.' and U.K's AAA credit rating.
The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, said Moody’s Investors Service. Economists from Morgan Stanley said they expect “multiple” increases in China’s bank-reserve ratio requirements, with the next one “imminent.”
A quoted analyst said that futher tightening by the People's Bank of China should be bullish for gold:
“China will raise interest rates and continue to increase the reserve requirement ratio” for banks, said Wu Zhengzheng, analyst at China International Futures Co. (Beijing). “Gold will be supported as long as uncertainties about the economy remain.”
Also mentioned in the report was the SPDR Gold Trust's holdings being unchanged on Friday.

There are reasons why gold may advance from here, but the market hasn't taken that much to them as of yet. After regular trading opened, gold slid down to the $1,105 level, dipped slightly below as of 8:30, but climbed right afterwards. That rise didn't add much to the metal's price. As of 8:52 AM ET, the spot price was $1,106.90 for a gain of $5.40 since Friday's close. The two categories in the Kitco Gold Index both widened: +$9.75 for predominant buying and -$4.10 for greenback strength. The U.S. Dollar Index has strengthened a little, getting well above 80.1 before slumping slightly below. As of 8:55, it was at 80.09.

So far, things have gone well for gold. The rest of the day will show if the recovery from last week's rout will continue.