Came The Wipeout...

It always seems to happen when least expected. After a neutral start to the regular trading day, the price of gold plummeted. At the bottom of this morning's waterfall decline, it was below $1,135. This time, a two-stage rout dropped the metal down to the depths it reached late this morning. The likely trigger was a rally in the greenback, as similar rallies have also catalyzed similar declines - even if the U.S. dollar hasn't ascended all that much.

The first stage of the plummet started at 8:40 AM ET, shortly after news about U.S. housing starts gave a lift to the U.S. Dollar Index. Continuing until about 9:10, and taking about eight dollars off the gold price, it double-bottomed and ended for about an hour where gold hovered around $1,148. A relief rally, starting at 10:00, took the metal all the way back up to $1,155 before the more serious part of the rout began at 10:35. Lasting until 11:15, it sliced off more than twenty dollars off the price until it abated at $1,133.30. A respite in the middle was merely a pause that reinforced. As of 11:46 AM ET, the spot price was $1,138.90 for a loss of $19.90 on the day. The Kitco Gold Index split the decline into -$15.40 for predominant selling and -$4.50 for a strengthening greenback.

The rally by the U.S. Dollar Index wasn't that great in magnitude, but it was solid despite a pullback in mid-morning. Between 8:30 and 9:20, the Index rallied well above 80.7 to reach 80.835. After hesitating, it turned downwards, reaching below 80.6 by 10:20. Another, stronger rally then began that carried it up to just below 80.9 before being replaced by a mild pullback. As of 11:47 AM, it was at 80.77

In the recent excitement, the risk of such a decline was all-but forgotten; this morning's plummet was a brutal reminder that the turf's still treacherous. If this one follows the script set by the last one, the day's declining will be over. Although the losses today will still be large, it's quite likely that gold will close above $1,135. $1,140 is doable.

Update: Not as of yet, anyway. There proved to be one more decline left in the gold market, which kicked in at 11:45 AM ET. After recovering to about $1,142 by that time, gold plummeted about twelve dollars an ounce in the next fifteen minutes; that drop made for a low of $1,129.30 right after noon. A slight recovery rally took the price up to around $1,132, where it hovered until 12:45. A futher slight rise took the price up to $1,135. As of 1:39 PM ET, the spot price was $1,135.20 for a loss of $23.60 on the day. The Kitco Gold Index attributed -$17.60 to predominant selling and -$6.00 to strength in the greenback.

The U.S. Dollar Index hasn't shown much strength since a rally peaked around 11:55 at 80.95, but it has shown some. Since that peak, it pulled back a little to the 80.8 level. Dipping to 80.75 shortly after 1:00, it recovered to 80.8 and above afterwards. As of 1:40 PM, it was at 80.86.

It's been a day of carnage for gold, but the usual interday patterns suggest that the carnage period has ended. A close between $1,135-$1,140 is still doable.


Update 2: Gold didn't do all that much for the rest of the day. The closing price was within the above range.

After inching along at $1,135 between 1:45 and 2:10 PM ET, the price rose to about $1,138. Those two values established a trading range that the metal stayed in for the rest of the afternoon, except for a slight blip-down between 3:05 and 3:10. At the end of the trading week, gold closed at $1,136.80 for a loss of $22.00 on the day. The Kitco Gold Index divided the loss into -$16.40 for predominant selling and -$5.60 for a strenghtening greenback. For the week, the metal lost $24.60, or 2.12%.

Until nearly the end of the session, the U.S. Dollar Index mostly slumped. After reaching 80.875 at 1:45, the Index pulled back to below 80.77 by 2:30. A partial retracement of the loss didn't stick, and the Index driftd back down again to the 80.75 level. A spurt-up just before the end of the regular session left it at 80.795 as of 5:00 PM.

Its daily chart, from Stockcharts.com, shows the Index poking up above the recently-established trading range, but not by much:



Although rising above 80.75, it never reached 81 even at its interday high. The MACD lines are still in a bearish configuration, and the RSI is only in the middle of its range. Although the action was fairly strong today, this rise looks more like a relief rally than the beginning of a new run. As of now, the direction is still indeterminate.

Gold, on the other hand, showed definite determinateness today:



As slamdowns go, there have been worse ones but today's was pretty bad. The $1,140 level was broken, and the metal's now back in the same territory that was marked as its range until the recent upswing. That being said, the day's plummet isn't terrible in context. Based upon recent chart action, there's a possibility of a continuation early next week before the current downtrand is finally exhausted. Such a continuation, unless especially severe, would likely push gold down to the $1,120 level. Because the beginning-of-the-month rally began at slightly above $1,100, a drop to $1,120 would still be a good sign.

Of course, there's also the chance that today's plummet was the end of the downward reaction. It might have been severe enough to drain the skittishness out of the gold market and encourage bargain hunters to come back in. Not immediately, as some would likely wait and hope for another price drop, but soon.

This week's Commitment of Traders graph for gold, with information current as of late Tuesday, shows an interesting phenomenon. Both non-commercial and commercial longs expanded: the former by 20,297 contracts or 8.38% and the latter by 8,799 contracts or 6.95%. Total open interest expanded by 31,883 contracts or 7.46%. Not only did commercial shorts expand, by 27,377 contracts or 7.37%, but also non-commercial shorts: by 3,001 contracts, or 7.72%. Tuesday's close for the spot price was $1,151.10: gold was down some from Friday's close, but not by that much. At the time, it was thought that the downturn was likely over. The shorts that held on got their reward today, but not until today.

Moving back to the U.S. Dollar Index, its own CoT graph shows a continued shrinkage of open interest: from April 6th's 47,956 contracts, last Tuesday's was 44,676 for a drop of 3,280 contracts or 6.84%. Non-commercial longs shrunk by 2,069 contracts or 5.87%. Commercial longs shrunk by 823 contracts or 12.0%. Commercial shorts shrunk by 3,609 contracts or 9.00%. The only reportable category that expanded was non-commercial shorts: it grew by 409 contracts or 8.03%. As of the close of Tuesday, the Index was a litle below 80.5 and had one more day's worth of drop in it. What longs that remained would have had the edge when Wednesday was over.

The afternoon Reuters report ascribed today's plummet to the SEC serving civil-fraud charges against Goldman, Sachs. They doing so drained risk appetite from the markets in general. Amongst other points, these were made:

* Investor risk appetite turns sharply lower after the SEC charged Goldman Sachs Group Inc (GS.N) with structuring and marketing a debt product tied to subprime mortgages.

* Major hedge fund Paulson & Co, which has been bullish on gold, was involved in SEC's complaint against Goldman.

* Gold futures ended the week about 2 percent lower. * Goldman news hit equities and commodities markets alike, but gold failed to receive safe-haven demand.

* Currencies uncertainties also weigh after China's President Hu Jintao said the country has always acted on the principle of gradually moving toward managed floating exchange rate system.

The third point deserves a look-over. Goldman's legal troubles may have been the specific catalyst, but the scare did not benefit gold; in fact, the opposite. There had been an air pocket developing in gold which was popped today. If Goldman was the real reason, that's better news than it looks now. Market-wide plummets due to specific disasters tend to be reversed unless they come in a context of general overvaluation. There's an argument to be made that gold is in overbought territory, but it doesn't seem to be all that overvalued right now. Bargain hunting still kicks in at levels at or near today's close.

Although today was distressing, there is some chance that the damage has been done and gold won't be put through another wringer. This hope is dependent upon an absence of another bearish driver, like the U.S. Dollar Index going up further. If Goldman is the cause, though, then it's likely that gold will fare fairly well this week. If not, then some more decline may be in store for the metal. Whatever next week holds, gold isn't likely to fall that much further unless a new bearish factor emerges.

Again, thanks for reading. May your weekend be restful, recreational and tranquil.