Gold Moves To Gain As $1,100 Surmounted

The disappointing housing-starts number served as a catalyst for gold, suggesting that fears of a Fed rate hike are still wearing on the metal - or that gold's been oversold recently and was looking for a justification to rebound. After remaining range-bound during the start of opening trading, gold rallied more than 11 dollars an ounce between just before 10:00 AM ET and 10:20. Topping out at $1,108, gold fell back afterwards and hung around the $1,105 level before falling further to $1,101.50 by 11:15 before rebounding. As of 11:23 AM ET, spot gold was at $1,103.90 for a gain of $0.90. The Kitco Gold Index attributed a $2.55 gain to predominant buying and a $1.65 loss to a strengthening greenback.

Although the U.S. Dollar Index is up on the day, it pulled back since its peak at 81 as of just before 8:00. Since then, it fell in an interrupted but definite decline that took the Index down to 80.575 by 10:52. Although the decline began before the housing-sales and inventory data were released, it did prompt the second leg after the Index rallied slightly for five minutes. Since that low, it recovered; it settled into a trading range between 80.67 and 80.73 since just before 11:00. As of 11:33, it was at 80.70.

Again, a drop - this time, a more serious one -below $1,100 has failed to hold. The floor may be breached again in afternoon trading, but the same resilence is likely to be there unless another waterfall decline intrudes. That's not likely this afternoon, which may see gold holding its gain.


Update: The slump ended at 11:15, and was replaced by an unusually strong relief rally that proved to be somewhat of a portent. By noon, the gold price settled into an extraordinarily narrow range at just above $1,104; for a brief time, it looked as if trading had stopped altogether. It was broken by a snap rally between 12:10 and 12:20 PM ET that took gold up to $1,108. Another slump followed, which carried the price down to $1,103. Subsequently, gold traded in a range with that same $1,103 as the floor and $1,104.50 as the ceiling before breaking down slightly due to a rise in the U.S. dollar. As of 1:49 PM ET, spot gold was even on the day at $1,102.60. The Kitco Gold Index added $3.20 to yesterday's closing price for predominant buying, and subtracted $3.20 for strength in the greenback. The sum of the two equals today's gain so far.

The U.S. Dollar Index slogged along since the original post, but it slogged upwards. The trading range mentioned above was intially broken on the downside shortly after noon, but was then broken again on the upside. Since then, starting from 12:50 PM, the Index has drifted in a narrower trading range between 80.72 and 80.79 before breakig through after 1:35. As of 1:51 PM ET, it was at 80.818.

Later afternoon sessions tend to be quiet. Gold is at little risk of a sustained subsequent downturn, and the chances of it recording day's gain are fairly good. It just might at the end of regular trading.


Update 2: As things turned out, gold did end with a gain on the day - but barely. The Euro held above $1.35, and that kept the U.S. Dollar Index from moving up much.

After settling in a trading range between 1:00 and 1:45 PM ET, gold moved down to a lower one between 1:45 and 3:10. That range, between $1,102 and $1,103.50, saw a slightly diminishing top but was broken through on the upside. After rallying to $1,106, the metal settled into yet another range until 5 PM. After an aborted attempt to get above $1,106 subsequently, it fell and ended up at $1,102.80 for a gain of $0.20 on the day. The Kitco Gold Index attributed $3.00' worth of decline to strengthening in the greenback and $3.20's worth to predominant buying.

Following a gentle rally between 1:40 and 3:00, which carried it from 80.75 to 80.92, the U.S. Dollar Index pulled back and then settled into a trading range of its own. Bordered by 80.775 on the downside and 80.84 on the upside, the Index remained there until 5:30 PM; it closed at 80.81.

The daily chart, from Stockcharts.com, shows an uptick from yesterday but also shows a continuing stall at the 81 level:



The fall early last week proved to be a real whipsawing. Since then, the Index has gotten back up to near the top of its current range but still in it. The decline that began on Feb 20th and ended last Thursday was only a gentle one, longer than the Dec. 23rd - Jan. 15th one but about the same in extent. There's still a risk that the Euro will fall below $1.35 due to Eurocrisis pressures, as the Euro-forex market has reacted badly to any sign that EU aid will not be forthcoming to the Grecian government. There is a chance that the Index will shoot above its February 19th high of about 81.3 if it breaks above the trading range and stays up. It's something worth watching for on Thursday and Friday, when the EU meeting is being held to straighten things out.

Until then, there's no compelling reason to expect the Index to break out of its range. It might, just as it might fall back, but there's no more immediate driver that would impel it to do so. And, of course, if aid is forthcoming then the Euro will almost certainly rise and the Index will fall. A stall will put downward pressure on gold, and an aid package (however indirect or even symbolic) will ease the headwind felt by the metal from U.S. dollar performance.

Speaking of gold, its own daily chart shows the $1,100 holding yet again despite market action exerting some pressure on it:



There's far from a guarantee that it will continue to hold, of course, but $1,100 been tested twice in the last two days and has held up. There are two ways in which this resilience can be interpreted: although the technical picture for gold looks bad right now, with an all-but-complete head and shoulders pattern indicating a drop, underlying strength from bargain hunting is mitigating an all-out drop. $1,100 is the neckline of the pattern. The longer gold goes without sustainably breaking the neckline, the weaker the following drop will be because of continued buyer support. It may wind up being a busted head and shoulders if bargain hunters keep co-operating as they have so far.

The other interpretation is simpler, if more brutal for bulls: the current support at $1,100 is in fact an air pocket, which will be punctured soon. The resultant waterfall decline will make the head-and-shoulders pattern a reality as gold descends to $1,075 or worse.

Whatever the outcome will be, the Eurocrisis and its own outcome has a lot to do with it. It's a sure thing that the second scenario will come into play if the greenback is kicked up by a snag in the EU meeting, which starts in a couple of days. I can't handicap the effects of the Grecian government seeking an IMF bailout, but I suspect it would mollify things. That head-and-shoulder pattern ties in with real-world events unusually neatly, I have to say.

For both gold and greenback, there's little to do except wait. Those with powder may want to consider keeping it dry for the nonce.

A Bloomberg article, as webbed by Business Week, says that gold rose because of hope that the greenback will weaken soon; the housing data reported this morning had an influence.

“The dollar looks less attractive after the housing numbers,” said Matt Zeman, a metals trader at LaSalle Futures Group in Chicago. “You’ve got the bargain hunters out to buy gold after the recent slide.”...

Purchases of existing homes dropped 0.6 percent from January to a 5.02 million annual pace, the lowest rate in eight months, the National Association of Realtors said in Washington. The median price fell 1.8 percent from a year earlier.

“Loss of confidence in economic growth -- and economic policies -- is expected to rekindle investor demand for gold as the year wears on, especially if a double-dip recession develops,” Rhona O’Connell, the managing director of GFMS Analytics, said today in a report.

Another trader structured the current trading range between $1,140 and $1,060 as the result of indecision about the extent of Fed easing...whether or not it's overeasing. The question for the market is, will inflation start to arrive before a rate hike?

I can say that, historically, the rate hike tends to come first. But, it's also historically true that the Fed has a record of overeasing. Inflationary (and/or bubble) tendencies outrace the Fed once the recovery is set in and rates go up.

More immediately, gold's resilience might continue tomorrow - but there is that risk of an air pocket. Any waterfall drenching may come as a result of greenback-enhancing news from Euroland, but the most vicious ones (bar one, on February 4th) have been internally-driven. Tomorrow will show if the bargain-hunting at below $1,100 still holds up. Of course, Thursday and Friday have more potential for excitement...