Gold Does Overnight-Morning U-Turn

After recovering from a morning dip, gold edged up further in overnight trading. US$1,140 was broken on the upside just after 7 PM ET, which resulted in gold making the day's high of $1,147.60. After that high, the price began drifting downwards to the $1,140 level until early this morning. Shortly after 3 AM ET, the price drifted below that level, stayed stuck there, and continued drifting downwards. As of the time of this post, spot gold's climbing back up a little; it's at $1,141.30.

Two reports take a different tone regarding gold's action. Reuters' is cautionary, with this anonymous analyst quoted:

"We continue to see potential for additional near-term weakness (in gold), particularly if, as we suspect, there is a continuation of the U.S. dollar rally that began in December," said Numis Securities in a note.

"The decisive break through $1,000 an ounce could now provide a solid floor to any correction, although we would not be surprised to see some panic/stop-loss selling if this level is breached."

On the other hand, Bloomberg's, is optimistic. This quote is indicative of the bullish cast of the quoted experts:

“The dollar is still under some pressure,” Walter de Wet, a Standard Bank Ltd. analyst in London, said today by phone. “That’s supporting precious metals. We’ve seen fairly good physical demand when prices drop, and that’s a good sign.”

Normally, this difference in quoted-expert opinion doesn't show up. The financial media is event-driven, and tends to corrall experts whose forecasts gibe with how the market acted. Two reports diverging this much suggests that gold's recent action has become a bit of a mystery - not to mention the U.S. dollar's direction.


Speaking of the greenback, the U.S. Dollar Index rallied back over 77 after sliding down early this morning to about 76.7. That low is above yesterday's 3+ week low of 76.596, and the index's 8 AM level was higher than yesterday's noon high of about 77. Currently, it's fallen back somewhat to about 76.8.

This weekly chart of the U.S. Dollar Index, from StockCharts.com, gives some perspective on the U.S. dollar question:




There's some similarity between the last seven weeks' movement and the June to mid-September period of 2008. The chief difference is in the magnitude of the snap-back. Comparatively, the last seven weeks have been much milder and the pause at the top longer. Unlike in August of '08, a few weeks' pause has not led to a resumption of the climb; instead, the greenback has pulled back. The MACD lines at the bottom of the graph still show an uptrend, but the RSI oscillator at the top shows a top-out in the mid-range. That level is more characteristic of bear market action than bull market - even though last November's bottom was higher than March '08's.

The overall picture is ambiguous. The higher-low and MACD factors suggest a primary bull trend. The recent relative-strength top suggests otherwise. So do the moving averages (the blue and red lines over the price record itself.) Both are falling, and the shorter-term 50-week moving average has crossed below the 200-week moving average.

It's ambiguities like these that are one reason that technical analysis is characterized as "voodoo." To be fair, the chart-skeptics have a point. The greenback is going to be driven by fundamentals of the future, which can trump even the neatest of chart patterns. Chart-watching is most helpful at extreme points, and we're not at one now.


Now that charts and moderation have been brought up, I might as well show you this one from Kitco. It's a 30-day chart of gold plus gold corrected for the U.S. dollar:



The raw gold price is tracked by the red line, and the Kitco-corrected price in tracked by the blue line. As you can see, the U.S dollar factor has been almost erased over the last 30 days. An odd coincidence, given that the gold market's eyes are on the U.S. dollar for direction.