Gold, After Early-Session Tumble, Makes It Above $1,100

Although the break above $1,100 is still short-term at this point, it points to the head-and-shoulders pattern (discussed recently on this blog) becoming a busted one. That's good news for the metal, as it's been more the case that bullish patterns of that sort have failed.

The regular session didn't start out all that well. After fluctuating around $1,098, the metal went for a tumble starting at 9 AM ET; by 9:15, it was at $1,093. A partial recovery prefaced another decline that took the price down to $1,090.40 as of just before 9:45.

Since then, there was a real rally. Although gold moved up unevenly, the upsurge was fairly swift. Right around 11:15, the metal broke above $1,100 on its way to above $1,105. As of 11:27 PM ET, spot gold was at $1,105.50 for a gain of $14.50 on the day. The Kitco Gold Index divided the gain into $7.20 for predominant buying and $7.30 for a weakening greenback.

The U.S. Dollar Index has sunk after a relief rally early in the session. A rally started as of 7:35 at 81.62, which got up to 81.96 as of 10:15. Since then, a quick drop pulled the Index down below 81.7 by 10:10. Afterwards, the Index was trading in an unevenly-bordered range that softened on the downside. As of 11:29 AM ET, it was at 81.64.

The sub-$1,100 demand that's been keeping gold from declining all that much is continuing to work, enough for it to be deemed a valid theme. Gold may not hold above $1,100 by the end of the week's session. If it does, then a real turnaround may be in the offing. The afternoon part of the session may see some more excitement, although the market is more likely to simply avoid any further disappointment. Whether the U.S. Dollar Index keeps slumping will have a big influence on the outcome.


Update: Gold made it above $1,105 in that same run, to $1,107.90 specifically, but pulled back to $1,100 before rallying again. $1,100 was actually touched twice while gold remained in a range with $1,102 as the top. Lasting from 12:35 to 1:15, it was broken on the upside by a more modest run. As of 1:37 PM ET, spot gold was at $1,104.20 for a gain of $13.20 on the day. The Kitco Gold Index divvied up the gain into $6.90 for predominant buying and $6.30 for greenback weakness.

The U.S. Dollar Index stayed in that ragged trading range, bordered by 81.6 on the downside and 81.71 on the upside, until it sluggishly rose above starting at 12:35. After a gentle and initially laboured run up to 81.8, it pulled back into the confines of the range. As of 1:39 PM, it was at 81.695.

There's likely to be quiet until the end of the session, which means that gold's chances for a weekly gain aren't that great. But, $1,100 is likely to survive as a renewed support level. The rest of the afternoon will speak to both.


Update 2: Gold didn't make a gain on the week, but it was much closer than I had thought. Instead of quieting down, the metal kept rising throughout the rest of the afternoon except for the last hour and twenty-five minutes. The $1,109.40 top of the day, reached precisely at 4 PM ET, would have put gold in the weekly-gain category had it held. It didn't, though; after spending forty-five minutes in a trading range centered at just above $1,108, gold slid down a little to close at $1,106.70. The gain for the day came in at $15.70; the Kitco Gold Index split it into $8.10 due to predominant buying and $7.60 due to weakening of the greenback.

That near-end decline made for a small loss of the week: $1.20, or 0.108%. Gold was almost within spitting distance of a second weekly gain, which would have been quite the achievement given how the metal fared over the course of this week.

The U.S. Dollar Index resumed its slump in the later-afternoon part of the session. After the peak at 1:10 PM, a two-stage rolling decline turned into a steadier one at 2:20. It continued until just before 4:05, when the Index reached 80.55. A relief rally during the rest of the session left it at 81.61 as of 5:30 PM.

Its daily chart, from Stockcharts.com, shows the extent of the drop from yesterday's excited levels:

Although unpredictable at the time, the RSI indicator's drift into almost-oversold territory did presage today's drop. So did the apparent resolution of the Grecian part of the Eurocrisis; bringing the IMF in proved not to be injurious to the Euro, despite what some forex traders had thought. That same indicator, found at the top of the chart, is now well below the oversold threshold. On the other hand, though, the MACD lines at the bottom are still in a solidly bullish zone. For the past four months, the Index has had a good run upwards whenever they've been. Unless some major bearish driver shows up, which it may thanks to the U.S.-PRC currency imbroglio, I would assume that today's drop is merely a secondary reaction in an uptrend.

The gold chart shows something similar to what took place early this month, although the shoe is now on the other side of the foot: a head-and-shoulder pattern was busted.



Unlike the inverse head and shoulders pattern that was drawn out between late January and early this month, the current one is a topping formation; its neckline was at $1,100. Gold did drop a fair bit below the neckline, and stayed there for a couple of sessions, but today's close put it above. Interestingly, the two head-and-shoulders overlap in time; the topping one started in mid-February.

It's part of techncial-analysis lore that a head-and-shoulders pattern is one of the most reliable in the stock market. Based upon recent experience, I have to say that they're not that reliable (except in the short term) for the gold market.

That point being made, the chart right now doesn't look all that impressive otherwise. There's still a short-term pattern of two lower highs and lower lows that have been made. Even with today's recovery, gold has a fair bit to go before that short-term bear trend can be considered erased. On the other hand, the sub-$1,100 bargain hunters have proven to be a real force in the market...even if they're going to be disappointed at week's start unless a real decline sets in Sunday night (ET).

This week's Commitment of Trader chart for the gold contract, current to last Tuesday, shows very slight shrinkages of both commercial and non-commercial longs. On the short side, non-commercials jumped by 18.5%. Given that gold was at the cusp of its decline that day, that jump showed a little prescience on the part of those shorters. Commercial shorts shrunk a little, as did total open interest.

The same wasn't the case for the U.S. Dollar Index CoT figures. Total open interest increased by 10.2% as non-commercial longs increased theirs by a slightly higher 10.8%. That showed some foresight, as Tuesday was the day before the Index rocketed up. Non-commerical shorts also increased, by 5.75%.

A Reuters report credited the weaker greenback and the EU-IMF rescue deal reached at the Eurosummit this morning as two main factors for gold's rise. It said that the gold market was expected to take its cue from the currency markets. Anong other points, these were therein:

* Gold supported by a stronger euro as the euro zone leaders won approval for an aid deal for Greece....

* Short-covering ahead of the weekend following April option expiration on Thursday triggered buying.

* Geopolitical tensions after a South Korean naval ship sunk in waters near a contested sea border with North Korea supports.

This week has made for a fairly wild ride, on both ends. The busting of the classical topping head-and-shoulders pattern was encouraging, but it also reinforces an overall trading-range characterization of gold's action over the course of this year. On the face of it, there's not the same hope that gold will continue to rise because the bargain-hunting support won't be there at higher levels. The best hope for gold right now is still a backtracking greenback.

Thanks for reading, and enjoy the respite of the weekend.