Gold Drive Down Again Overnight, This Time By U.S. Dollar Strength

The U.S. Dollar Index did break 81, in a big way, overnight. The trigger was a Fitch downgrade of Portugal's debt, driving the Euro below the $1.35 support level, and general Euroland-related woes. The downgrade seemed to come near the end of a run for the Index, suggesting that it had been discounted in advance.

The metal actually held up well last night until morning began. After an initial rally when evening trading began, which took it up to $1,105, gold settled in to a trading range between that level and $1,102. It didn't break down until after 1 AM ET, after which an uneven but long-lasting decline set in. The price hesitated around $1,100 between 2:00 and 3:20, but the metal broke through on the downside and continued to drop. The decline didn't end until just after 6:00, with the price reaching $1,093.00. Since then, gold entered a relief rally that kept it above $1,095, but not by much, until just before 8:00. As of 8:07 AM, spot gold was at $1,094.60 for a drop of $8.20 on the day. The Kitco Gold Index attributed -$10.60 due to a strengthening greenback and +2.40 due to predominant buying.

The Euro indeed broke through $1.35, not to mention below $1.34, and the U.S. Dollar Index has leapt up in consequence. The rise was steady throughout the night, with 81 being sustainably breached to the upside just before midnight. An earlier attempt just before 9:30 wasn't. The rally accelerated at 1:10, followed by a narrow trading range and a slight exhaustion drop, but the big leap took place between 4:35 and 5:05. As of 5:10, the Index was just below 81.5. Two further waves pushed it up to 81.67 by 7:50, after which it quieted down for a little while. As of 8:18 AM ET, the Index was at 81.61.

A Wall Street Journal article attributes gold's drop to the collapsing euro, as do the two following, but also mentions that gold's fall is being buffered by bargain-hunting and physical demand - for now.

"[Gold is] holding quite well despite the euro collapsing," said Michael Kempinski, a precious metals trader at Commerzbank in Luxembourg. Physical buying on gold's dips have given the metal some price support, but with the euro unable to stop its slide against the dollar, gold buyers may hold off in expectation of lower prices, he said.

Also mentioned is the perhaps surprising fact that the SPDR Gold Shares Trust's holdings increased yesterday.

Reuters' morning look also starts off with the greenback's rise, and says that outcome of this week's EU meeting is unlikely to deter Euro bears. It's increasingly rumoured, increasingly credibly, that the IMF will be involevd in any rescue effort.

"If we continue to have nervousness over Europe and the euro, then we are likely to see supported dollar values and therefore slightly weaker gold values," said David Wilson, an analyst at Societe Generale.

The SPDR Gold Trust's holdings increase had a number put to it: a 4.6 ton rise to a total of 1120.079 tons.

A Bloomberg report, as webbed by Business Week, structured the euro's fall as a rising greenback in the introduction, and echoed the point made in the WSJ piece about demand buffering the greenback leap:

“The weaker euro seems set to weigh further in the coming sessions,” James Moore, an analyst at TheBullionDesk.com in London, said in a report. Still, “the scale of buying around and below $1,100 an ounce suggests further pockets of investment diversification will continue to underpin prices.”

It also mentions that the above-noted rumour has been confirmed by a German Finance Ministry official speaking confidentially.

The durable-goods numbers for February showed an increase for the third straight month, although the 0.5% increase was lower than expected. One reason for the shortfall was an upward revision in January's increase. The gold market didn't take to the news very well; it amplified a fall that accompanied the start of regular trading. When 8:15 arrived, the metal began a downturn that took it from $1,095 to $1,088, with five dollars being lopped off between 8:30 and decline's end at 8:40. As of 8:55 AM, spot gold was at $1,090.50 for a drop of $12.30 on the day. The Kitco Gold Index attributed all of the decline to U.S. dollar strength. As for the U.S. Dollar Index, it was up since last read, at 81.74.

So far, the day looks like one of those punctuated by a punctured air pocket. The support given by bargain hunting is already being tested, and may be tested further later in the morning.