Gold Slumps; $1,110 Fails To Hold

The end of the Eurorelief rally has now come. As the U.S. Dollar Index shrugged off its recent slump, gold fell.

The regular trading session began with gold hovering around the $1,110 level. Starting at 8:30 AM ET, though, the metal dropped. At first slowly and interruptedly, the decline picked up steam starting at 9:30. Between that time and 10:50, gold lost almost nine dollars an ounce. The decline was more dragged out than a waterfall plummet, but it wasn't minor. As of 11:35 AM ET, a respite that started at the latter time was still in place: spot gold was at $1,104.00 for a loss of $5.00 on the day. The Kitco Gold Index split the decline into -$1.95 due to predominant selling and -$3.05 due to a strengthening of the greenback.

The main driver for gold's fall was the U.S. Dollar Index, which has been climbing fairly steadily since 9:07 AM. From 81.18, it rose higher than 81.56 by 11:25 AM. As of 11:36, it was stuck in a pullback at 81.50.

There's been a disappointing morning for the metal, but the three-day rally ended yesterday was looking like it was running out of steam. Once again, the $1,100 level has become the one to watch.


Update: There's actually been a recovery in gold since the 10:50 bottom. $1,100 wasn't even touched.

Between 11:00 AM ET and 12:20 PM, a ragged trading range developed that was centered around $1,103. After getting saggy in the end of that timeframe, gold popped up to the $1,105 level as of 12:35. That pop failed to take; after gold muddled in a trading range between $1,105 and $1,104, it slumped to the $1,103-4 range before poking up again. As of 1:47 PM, the spot price was $1,104.50 for a loss of $4.50 on the day. The Kitco Gold Index assigned -$1.30 to the predominant-selling category and $3.20 to the strengthening-greenback category.

After peaking as of 11:25, the U.S. Dollar index pulled back a little until 12:55 PM. From its top at 81.575, it slowly sunk down to the 81.42 level. Subsequently, it pulled up again to a little above the 81.5 level. Overall, the ascent and descent made a saucer shape on the chart. As of 1:49 PM ET, it was at 81.51.

Despite the recovery in the greenback, gold's not faring that badly subsequent to the decline. The rest of the afternoon may see a test of $1,100, but it doesn't look likely that it'll be breached in any serious way.


Update 2: It wasn't, although there was a late-afternoon drop that knocked it down to the $1,103 level. The pre-holiday-weekend quietness might be settling in, or it might be the usual late-afternoon doldrums.

Gold settled into a narrow trading range between $1,104 and $1,105 starting at 1:30 PM ET; it lasted until 3:30, when a slide took the price down to $1,103. From there 'til the close, a lower range was established between that same $1,103 and $1,104. The close found gold ending the session at the lower middle of the range: $1,103.30, for a loss of $5.70 on the day. The Kitco Gold Index attributed -$2.60 due to predominant selling and -$3.10 due to strengthening of the greenback.

The U.S. Dollar Index was also quiet for the rest of the afternoon; it remained near 81.5, although somewhat below it as the session wore on. A gentle rise, from 12:50 to to 2:10, turned into a gentler dip that ended at 2:55. Since then, the Index traded in a range centered at 81.45. As of 5:30, it was at 81.47.

The daily chart, as always from Stockcharts.com, shows that the plummet is indeed over:



The bottom of today's candlestick shows support held up at 81.0. The day's overall action shows a recovery for the greenback, which may continue tomorrow. Given the suddenness and extent of the decline over the last two trading days, some kind of rally wasn't too surprising. The important question is, how far will it go? Is today's action a mere relief rally, or is it the foundation for another try at 82?

The winds for the Index are bullish, but a serious run in the near future looks unlikely at this point - barring a resumption of the Eurocrisis. My own guessifier says that, whatever be brewing under the lid, the chances of an immediate resumption aren't great. If the Eurocrisis can be compared to the 2008 financial crisis, then the best match for Greece would be Bear, Sterns. That firm imploded on February. The second wave didn't hit until September.

More to the point, the authorities are now alerted. Accidents happen, but they tend to happen when the pot isn't watched. It's being watched now. The only source of complacency can come from those authorities nodding off beause the Eurocrisis was "solved." As the above analogy indicates, it'll likely take months before a more serious eruption. Shattered complacency takes time to rebuild.

That being said, there doesn't appear to be any other driver except for an overall bullish trend. Longer-term U.S. interest rates are going up, which does have a positive effect, but those kind of fundamentals take time to work their way through the market. My own guess is that the greenback will dawdle at this level; I can't think of any driver that would push it down far more.

Regarding gold, its decline today dovetails with the sputtering nature of yesterday's part of the recent rally:



Although the decline wasn't minor from a day-to-day perspective, it doesn't look all that lousy from the perspective of the daily chart. $1,100 keeps holding, as that price is well-anchored as a bargain point.

The rest of this week, despite the slowness expected to preface the upcoming four-day weekend, is going to be interesting. The current short-term downtrend will be called into question if the current drop ends above the level of the last one. Above $1,094 would do it. There's a chance that the current drop hasn't ended, so again $1,100 is the level to watch.

A Marketwatch report contrasts gold with copper: the latter made a 19-month high today, while gold languished. The reasons given were the stronger greenback, and lack of buyer interest right now:

"We don't think there's much momentum right now for gold going higher," said Walter de Wet, an analyst with Standard Chartered bank in London. "The dollar strength is dampening investor demand" and investors are booking profits as soon as prices approach the $1,011-$1,015 level, helping to keep gold rangebound, he added.

It may continue to be so for the rest of the week. We'll find out.