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 Stockcharts.com, 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.