Gold Pauses After Early-Morning Drop, Then Drops Further

The beginning of regular trading for the metal wasn't good. Although not subject to an all-out hammering, gold dropped eight dollars an ounce between 8:10 and 8:40. The decline was accelerated by a disappointing durable-goods report for February.

Since then, the metal fluctuated, initially upwards, after a relief rally pulled it from its $1,087.20 low to above $1,090. After spending some time in a trading range between $1,092 and $1,093, gold pulled back a little before drifting again. As of 11:40 AM ET, the spot price was $1,092.20 for a loss of $10.60 on the day. The Kitco Gold Index assigned $12.60 worth of decline to a strengthening greenback, but assigned an increase of $2.00 for predominant buying. The two sum up to the overall decline.

The U.S. Dollar Index has basically held its own since its early morning smash-through of the 81 support level. A peak of 81.815 around 8:30 was followed by a higher one, at 81.83, as of 9:45. The mild dip in between was followed by a deeper one, which took the Index down below 81.58 by 10:23. Since then, it's recovered to near peak level. As of 11:41 AM ET, it was at 81.74.

The source of gold's earlier decline was obviously U.S. dollar strength, but a certain dog has not barked as of yet despite ample opportunity to do so when regular trading began: there's been no waterfall plummet. There's still a risk of one in the early afternoon. If that period passes without, then the resilence of bargain-hunting demand will be confirmed.


Update: Driven down by a further advance in the greenback, gold slumped a little in the early afternoon - but only a little.

Except for two downward cracks at 11:20 and 11:50 AM ET, $1,091 served as a floor until just before 1:15. In that period, gold mostly traded sideways until a small run-up at 12:45 got the price up to $1,093. A second attempt as of 1:00 prefaced a decline that pulled gold down below $1,091 and even $1,090. A couple of relief rallies failed to raise the price for any lengthy time. As of 1:50 PM ET, spot gold was at $1,088.40 for a drop of $13.40 on the day. The Kitco Gold Index divided the gain into -$13.65 due to a strengthening greenback and -$0.80 due to predominant selling.

As the first of the two categories indicated, the U.S. Dollar Index did strengthen a little in the early afternoon. After recovering from its bowl-shaped drop, the Index first traded in a range between 81.7 and 81.83, and then climbed up to a new high of the day. That high of 81.91 was reached as of 1:19 PM. Since then the Index has drifted; as of 1:52 PM ET, it was at 81.86.

The early-afternoon session wasn't easy on gold, but there was no waterfall decline. That says something, as conditions similar to the one the gold market is facing today have prompted them. Sub-$1,100 support has not been solid, but it is resilient enough to be respected. Although conditions as of 1:50 don't suggest so, the rest of the afternoon may see somewhat of a recovery.


Update 2: There wasn't one, although the continued decline was mild. Essentially, it was over just after 2:00 PM ET.

The decline that halted at that time started at about 1:40, with gold above $1,090. When it was over, the metal was at $1,085.50. Subsequently, gold was in a trading range whose top was set by a relief rally; it was bordered by $1,088 on the upside and $1,084.50 on the downside. Although the metal slipped to $1,083.50 sometime within, that downward spike didn't last. Perhaps out of further relief, the metal vaulted up to near the top of the range at the end of the trading day. The closing value for spot gold was $1,087.50 for a loss of $15.30. The Kitco Gold Index actually credited $0.20 for predominant buying, and took off $15.50 for a strengthening greenback.

That strength continued in mid- and late afternoon. The U.S. Dollar Index, after some indecision up until 2:20, started climbing steadily in three waves before peaking at 82.02 as of 5:05. A small pullback was mostly reversed at the end of the regular trading day and the Index ended up at 81.99 as of 5:30 PM.

Its daily chart, from Stockcharts.com, shows a clean break-out from the 81 top of its former range:



Now there's a clean breakout. I have to admit to not seeing it come today because I expected any such vaulting to be more EU-driven. The Fitch downgrade of Portugal's bonds took me by surprise, but evidently not the Index market. Every difficulty in Euroland adds fuel to the dollar rally; lately, when there's been no bad news, rumours sometimes act as a substitute. The Index now needs little excuse from Euroland to rally. It's had quite a big one in the last five trading sessions: from 79.5 at the low to 82 at the high. Today, it raced up by more than a full point.

It's only a matter of time before the Index is overbought. The RSI indicator at the top of the graph is near the overbought range. On the other hand, the MACD lines on the bottom of the graph have clearly crossed over into what is a bullish pattern. The last two times it has done so, the Index has had a nice run upwards. Today's the first day of the crossover, and a level was reached that hasn't been seen since last May. The Index is above the highest levels reached in June and July, and has breached an important resistance point.

All of that bullishness does not bode that well for gold, even if it squeezes some ex-greenback benefit from the same crisis. Its daily chart, also from Stockcharts.com, shows a solid decline today:



It wasn't a sudden one, but the lack of suddeness was made up for in staying power. The head-and-shoulders pattern indicating a downturn is now completed; the price broke through the $1,100 neckline today. Those who've kept their powder dry seem to have made a good decision.

I wish I could be unabashedly optimistic about the no-waterfall aspect of this day, but there really are two ways it can be interpreted. First of all, it could be that support below $1,100 - particularly, below $1,090 - is resilient enough to keep gold from declining much further. But, it could also be that a waterfall decline is an equilibrating force. The decline is squeezed into a short (and sometimes unnerving) space of minutes, but then ends. Without one, declines are more stretched-out. If this take is the correct one, then gold still has some ways to go until it bottoms out; it'll just take longer.

The level at which gold's at now, although less important than $1,100, is still an important one. What counts in coming days is whether or not the current decline is arrested at these levels. If not, then we could see $1,060 or so (if not lower.) A continued bull run for the U.S. dollar index does dovetail with the second take.

The above two paragraphs are mere scenarioizing, however. Which scenario pans out will not be evident until the rest of the week's trading is done and booked. I note in passing that waterfall declines sometimes get ahead of themselves on the downside, which sometimes gives gold a net boost after one's over. Forgive the PSA, but leveraged futures trading is risky - even with tight stops. Those leave you exposed to being nickel-and-dimed to death, before commissions.

A Reuters report not only points to the connection between the rising greenback and falling gold, but also cites falling investor appetite for the metal. Amongst others, these points were made therein:

* Surging U.S. interest rates, driven by sharply higher U.S. Treasury yields, prompted selling - Bill O'Neill at LOGIC Advisors in New Jersey.

* U.S. currency extends gains after data showed new orders for durable goods rose for third straight month in February.

* Sentiment cautious as investors look forward to CFTC public hearing on futures and options in metals on Thursday.

This day did have a silver lining, in that the huge rally of the U.S. dollar might have prompted more selling than it did. As noted above, Kitco's Gold Index had gold ex-dollar at just about even for the day. There wasn't any panic over the rally, which could mean that the greenback surge-up was widely expected in the gold market. Tomorrow will pit bargain-hunting desire against further downward pressure if the greenback keeps rallying, which looks like it's going to happen. The former may prevail.