Gold Drops Below $1,100 Despite Greenback Weakening, But Regains It

The rout continued. From 8:40 AM ET to 9:10, gold plummeted from about $1,105 to $1,095. After losing ten dollars an ounce, the metal crawled back up to $1,098 before falling to $1,091.50. A relief rally led to a double dip, and a slightly rising channel that pulled gold up from its lows but failed to reach $1,100. That channle turned into a trading range with a ceiling of $1,098. As of 11:35 AM ET, spot gold was at $1,095.60 for a loss of $12.30 since last Friday's closing price. The Kitco Gold Index attributed -$11.80 to predominant selling and -$0.50 for a strengthening greenback.

The U.S. Dollar Index did make it above 81.05 by 9 AM, but has sunk back until 11:10 except for a respite. Since the latter time, the Index has gove from below 80.7 to the 80.8 level. As of 11:41 AM ET, it was at 80.76.

Given how the gold chart will look, it's almost inevitable that there'll be more gold bears coming out of the woods. How much grist they'll have will be shown by the rest of the day's trading.


Update: The fallback of the U.S. Dollar Index managed to bring gold up again. For an hour, it was above $1,100.

The above-mentioned trading range was broken through on the upside right around 11:50 AM ET. Gold sailed up to $1,100 by noon, and spent a half an hour bobbing between that level and $1,098. Another uptrend pushed the metal above $1,100 and, by 1:00, to $1,103. A downward reaction pushed it below $1,100 again, but not by much. As of 1:45 PM ET, spot gold was at $1,099.60 for a drop of $8.30 since last Friday's close. The Kitco Gold Index assigned -$10.90 to predominant selling and +2.60 to a weakening greenback.

The rally in the U.S. Dollar Index from 11 AM to 11:45 turned out to be another relief rally; since then, the Index kept falling. By 12:35, it was below 80.55. Since then, it was fluctuating in a range bordered by that level and 80.625. As of 1:47 AM ET, the Index was at 80.56.

Although porous, the $1,100 support level is still exerting its influence. The rest of the afternoon will show whether it has been restored.


Update 2: It was, at least for today. The descent that began at 1 PM ET ended just before 2:15, at $1,097. Subsequently, gold advanced laboredly, sometimes inconsistently, but upwards still. $1,100 was breached on the upside as of just before 3:30. It stayed slightly above that level for an hour, but advanced a little afterwards. A dip just before the close was more than recovered from. As a result, spot gold closed at $1,102.60 with the loss since Friday's close pared to $5.30. The Kitco Gold Index lowered the loss attributed to predominant selling to $7.60; the gain due to a weakening greenback was upped a little to $2.30.

The U.S. Dollar Index went almost nowhere for the rest of the session. After a slight rally, which took it from 80.55 as of 1:55 PM to 80.67 as of 2:15, the Index slowly descended in a reasonably consistent, but gentle, slide. As of 5:30, it was at 80.58.

Its daily chart shows the backtrack from its one-day spike-up on Friday:

Despite the fear over the Eurocrisis and the consequent demand for the greenback, the U.S. Dollar Index didn't get to the high set on February 19th. The Index bounced off the 81 level today instead of closing above it. From a less short-term vantage point, it can be said that the Index has been in a trading range between 79.5 and 81 since February 4th.

Of course, today's pullback may have been preparation for a solider run at 81 that would best it. Doing so would entail breaking through, and staying above, a major resistance level. It's the same one that the Index failed to best in June of July of '09, which ended up prefacing its decline until December 2nd. It also marks about the half-way point between the three-year high set in March of '09 and the low set on that same December 2nd.

Currently, though, the Index's trading has been too directionless to see where it'll end up, except for a relatively safe guess that the trading range will continue. If it gets and stays above 81, there's a good chance at a new bull phase for it.

The daily chart for gold is beginning to look a bit worrisome, except to bears and those who are counting on bargain-hunting to keep the price above $1,100:



Evident from the chart is an almost-completed head and shoulders topping pattern. Given that gold's been in a longer-term trading range from mid-December on, it would be an odd one if it goes to completion: it's neither a toppy reversal nor a bear-market continuation pattern. Taking the overall range into consideration, it may be forecasting another descent to at or near the bottom. That means $1,060 or so.

There is that risk, one that dovetails with another run upwards for the U.S. dollar. $1,100 as a bargain point is no guarantee that the price won't fall below and stay; bargain hunters are okay with holding back from a price drop if they think there's a better bargain coming later. That strategy did not work the last time gold hit $1,100, on Friday before last, and it hasn't worked this day. However, if gold does sustainably fall below $1,100, it may work the next time 'round.

Apart from the U.S. dollar vaulting up, though, there's no real driver to push it down to February 4th-5th levels. Techncial selling may do so, but that kind of selling won't result in a longer-term lowering of the price. As with the dollar, the picture for gold looks uncertain right now. I just note the risk of a break below the $1,100 neckline that sticks, which would lead to one of those selling cascades again.

A Wall Street Journal article explains gold's lackluster performance today by earlier strength in the dollar, plus the aftereffects of the Indian central bank's decision to raise interest rates last Friday, followed by a wait-and-see attitude amongst would-be buyers:

Gold slid largely in response to early-day strength in the U.S. dollar, said Leonard Kaplan, president of Prospector Asset Management. Traders often buy gold as a hedge against dollar weakness but conversely sell when the dollar rises. Furthermore, a stronger dollar makes commodities more expensive in other currencies and thus can hurt demand.

"Not only do you have the dollar rising, but you have Indian interest rates going up, which provides more competition," Kaplan said. India's central bank raised rates Friday, and this could mean some shift toward interest-rate assets rather than gold, he said.

"Not a lot, because they didn't raise it a lot," Kaplan said. "But still, any competition is competition."

Another trader is quoted as saying that bargain hunters seem to be waiting to get $1,085.

Today wasn't a great day for gold, even for bears, but the afternoon bounceback shows that there's still some hidden strength at the $1,100 level. It may fade over the course of this week, but it's still a well-anchored bargain point amongst gold buyers. The metal's decline may continue, but it's unlikely to be anything other than a short-term one. We'll see if it continues tomorrow.