After Lull, Gold Continues Dropping Overall But Moderates In Afternoon

I have to admit to being surprised again. After a slight gain in the first hour of regular trading, which left gold peaking at more than $1,157, the metal took a tumble after a dip-and-return failed to reach the regular-trading high made at 9:00 AM ET. Starting at 9:30, the resulting three-stage decline pulled down the metal more than twelve dollars an ounce before bottoming at $1,144.20 just after 10:35. Since that time, gold has been fluctuating in a $1,144-$1,148 trading range that yielded on the upside only at 11:20. As of 11:44, the spot price was $1,150.70 for a loss of $5.30 on the day. The Kitco Gold Index apportioned -$5.05 to predominant selling and -$0.25 to a strengthening greenback.

The U.S. Dollar Index did reverse its earlier weakness, starting to rally around 9:10. From below 80.3, it ascended in a relatively smooth rally all the way up to 80.75 by 11:15. Again, an Index rally has prompted (or accentuated) a drop in gold. Since that peak, the Index has tailed off a bit; as of 11:46 AM, it had sunk to 80.58.

The morning action showed that the correction gold has undergone is not over, and that a rising U.S. Dollar Index still provides a trigger for selling. The decline in gold may be put on hold for the day, but the corrective phase is not over. The afternoon will show if the drops continue.


Update: So far, gold's recovered a little. After rallying to the $1,150 level, and hanging around there until noon, the metal crept up above $1,152 before pulling back to $1,150 again. Another rally to a little above $1,152 carved out a new short-term trading range between $1,150 and $1,152.50. As of 1:43 PM ET, the spot price was $1,152.10 for a loss of $3.90 on the day. The Kitco Gold Index assigned -$4.50 to predominant selling and +$0.60 to a weakening greenback. (When added together, the two figures yield the raw gain or loss.)

The U.S. Dollar Index, after pulling back a little in late morning, remained largely quiescent in the early afternoon. Establishing a new range between 80.5 and 80.6, the Index fluctuated directionlessly. As of 1:45 PM, it was at 80.54.

During the early afternoon, there was no resumption of the morning decline in gold. That might be a sign that the metal will close around $1,150 for a modest loss. The rest of the afternoon will tell.


Update 2: It didn't close at $1,150, but it wasn't much above.

Gold actually spent two and three-quarter hours in a trading range between $1,152 and $1,153.50. The range wasn't broken through, on the downside, until 3:45 PM ET. That fall-through established a slightly lower range, between $1,050.50 and a little over $1,152; the metal stayed within its confines until the end of the regular session. At that close, it was at $1,151.10 for a drop of $4.90 on the day. The Kitco Gold Index attributed -$6.60 to predominant selling and +$1.70 to a weakening greenback.

The U.S. Dollar Index did weaken somewhat during later afternoon. That above-mentioned trading range was broken on the downside as of 2:50, but further declines were sluggish and partially reversed until 4:05. In the interim, the Index did climb back up into the range. Starting at the latter time, though, a decline pushed it down to below 80.4 before a recovery pulled it up above 80.45. That recovery draining away, the Index closed at 80.42.

Its daily chart, from Stockcharts.com, shows how little volatility there was for the Index today:



More remarkably, the Index stayed about where it was as of yesterday. Also remarkable: for the second time since December 7th of last year, the first time being yesterday, it's straddling its 50-day moving average (in blue.) It's still well above its 200-day moving average.

For a relief rally, today hasn't been much of one. The last comparable plummet, as of March 29th, saw a nice relief rally the next day. Today, there wasn't. The wind is out of the Index's sails in a way that it hasn't been since the present bull run began.

On the other hand, yesterday's decline hasn't continued. 80 remains unbreached on the downside, and the Index seems comfortable enough hanging around 80.5. It's unlikely that the current quiescence will last, but there's little to determine where it'll go once the quiet time ends. The MACD lines are in a solidly bearish configuration, but they're bearish enough to allow for a little upside leeway without breaking the pattern. Tomorrow may see a rally that makes a try at 81, which wouldn't be a threat to its present short-term bearish trend. I think the more significant move would be a downward one, particularly if 80 is breached. 79.5 would set off an alarm bell, even if followed by a decent short-term rally. Of course, the Index is nowhere near that right now. For today, although the short-term trend is presumably bearish, the Index is still in wait-and-see mode.

As far as gold is concerned, its decline today was fairly moderate:



Although no relief rally benefitted gold today, the decline could have been much worse; in fact, it was worse as of mid-late morning. $1,150 held up, and there was no major plummet that stuck 'til the end of the day. Admittedly, that moderation also means that the current downtrend may simply take longer.

Even if it does, the short-term bullish trend is still intact and likely'll still be once the bottom comes. Gold's own MACD lines are in a solidly bullish configuration, and there's a chance that the RSI line at the top will bottom at about 50 - the mid-level. If so, then gold would have acted like it did back in the old bullish days: back in '09, a 50 RSI served as a reliable bottom. Regarding the price, I say that bottoming above $1,120 will be encouraging.

Of course, we're a long way from declaring the gold bull to have awoken using standard technical measurements. In order to declare a bullish uptrend, gold would have to bottom at well above $1,100 and then make a new 2010 high above $1,170. We might see a corkscrew instead, which would mean that the bull's still snoozing. My own trend-change hunch may be wrong. As things stand as of now, though, the picture still looks good for the metal.

An afternoon Wall Street Journal report ascribes today's drop to profit-taking, and the moderation of the loss to short covering.

"The market is stalling in this area, so some of the dealers in Asia took a few profits," said Bill O'Neill, one of the principals with LOGIC Advisors. This prompted weakness overnight in Asia-Pacific trade, which spilled over into the U.S.

Also, there is less "fear" in the market about sovereign debt issues in Europe, at least for the moment, O'Neill said. Still, he and others expressed doubt the issues will go away and suggested they are likely to remain a longer-term supportive influence for gold.

"The market got a little ahead of itself, and then there was a desire for profit-taking," said George Gero, vice president with RBC Capital Markets Global Futures...

Just as gold initially fell on profit-taking, the metal later pared its loss on short covering, which is buying to offset positions by traders who previously sold, Gero said....

Technically, one key will be whether June gold can hold a breakout level of roughly $1,145 an ounce, says Spencer Patton, founder and chief investment officer of Steel Vine Investments. This area was failed resistance from several weeks ago that turned into support as gold broke above.

"If we break through this level, the sell-off could accelerate quite dramatically," Patton said. If so, this could mean a retest of $1,100.

Maybe, but $1,125 stands between it and $1,145.

As corrections go, this one's been fairly orderly. It's likely to have some ways to go, but gold put on a lot of gain from $1,100 to $1,170. Overall, there's still reason to be sanguine.