Gold, Driven By Falling Greenback, Rises In Morning And Drifts In Afternoon

The story of the day for gold has been the falling greenback. After an attempt to get above 81.5, which was blocked as of 9:25 right at that level, the U.S. Dollar Index fell below 81. That drop put extra wind in gold's sails. After a downward test pushed gold down to below $1,152, the metal reversed course and sailed up to well above $1,160. Unless a real spill is awaiting it this afternoon, gold is on track for another daily gain today.

Regular trading started out indecisively, with gold muddling around the $1,156 level. Sinking slowly between 9:00 and 9:30 PM ET, that slump reversed for a time but accelerated as gold was pushed down to $1,150.10 as of just before 10:00. That slump, perhaps a shorters' test of the water, reversed and turned into a rally with legs as the greenback slumped. The metal rose above $1,160 by 11:15, and was still rising as morning turned into afternoon. As of 11:59 AM ET, the spot price was $1,162.50 for a gain of $11.30 on the day. The Kitco Gold Index split the gain into $5.00 for predominant buying and $6.30 for a weakening greenback.

The U.S. Dollar Index, after slightly rallying between the opening of regular trading and 9:25, took a tumble when the Euro was boosted by speculation that the Grecian government may receive aid as early as this weekend. By 10:10, the Index was just above 81. A partial recovery led to a further downturn, which saw the Index drop below the 81 level before recovering again. As of 11:59 AM ET, it was at 81.04.

The above needs little comment. As afternoon trading gets rolling, a surprise plummet isn't likely waiting in the wings - so gold has a good chance at a seventh straight gain today. The metal might pull back, though.


Update: So far, it has. After peaking at $1,165.90 as of just before 11:45, gold sunk back to the $1,162 level by noon ET. Pulling up a bit, the metal drifted around $1,163 before continuing to drop. $1,162 was breached on the downside by 12:50. Drifting down further, the metal halted its decline at a little above $1,160. As of 1:51 PM ET, the spot price was $1,160.90 for a gain of $9.70 on the day. The Kitco Gold Index divided the gain up into $2.95 for predominant buying and $6.75 for weakening of the greenback.

Little has happened to the U.S. Dollar Index since noon. After pulling up to the 80.05 level, it crawled along in a trading range between that level and 81. As of 1:53 PM, it was 81.01.

As the end of the week approaches, the excitement is fading from the gold market. It's very likely, though, that today's action will end with a gain in both raw terms and ex-dollar terms. The rest of the session is likely to be unexciting, but the day's seems to have used up its ration of excitement already.


Update 2: The downdrift did continue for some time, but it reversed. Gold managed to bank a seventh straight session of gains. This calendar week was one with no down days. Both are records of at least a year's standing.

$1,160 was briefly tested on the downside between 2:05 and 2:15 PM ET, but it held. The metal spent the next hour dragging along that level until it began inching up at 3:30. Reaching $1,162, the price pulled back a little before inching up again near the end of the session. A final drop left the spot price at $1,161.40 for a gain of $10.20 on the day. The Kitco Gold Index (KGX) separated the gain into +1.60 for predominant buying and +$8.60 for a weakening greenback. The KGX itself made another record closing high today.

This week was an unusually good one for the metal. From last Friday's close of $1,126.40, gold gained an even $35.00 an ounce or a less even 3.11%. This gain piggybacked on last week's rise of $19.70 or 1.78%.

As far as the greenback is concerned, the U.S. Dollar Index did try to rally after that narrow trading range was broken just after 2:00, but the rally fizzled at 3:00 and was replaced by a decline that took the Index down below 81.0. From 3:30 PM to the end of the session, the Index drifted downwards after that decline had climaxed with a large drop. At the end of the week, it was at 80.89.

Its daily chart, from Stockcharts.com, shows that the supposed flag pattern in its recent action didn't turn out to be a bullish continuation patten after all:



There have been relief rallies, but today's drop can justly be called a relief decline. Now that the pressure's being relieved on the Euro, because of a hoped-for resolution to the Grecian part of the Eurocrisis, the Index is close to plumbing the bottom of its recent holding pattern. As with gold, the Index's MACD lines had it right. Their turn to a bearish configuration near the end of last month did harbinge a tough time for the Index itself, even if it hasn't given off any real bearish signal in its own movements. A sealed deal for the Grecian government would likely provide the downward push. If the rumoured weekend rescue deal turns into fact, the Index won't see 81 on Monday.

That being said, the recent low of about 80.75 has not been broken. Nor has the important support level of 80.5. If there proves to be no deal, then the Index might rally as the speculative wind at its head eases.

Turning to gold, its own chart shows quite the run, with a top today that made for a new 2010 high, both interday and closing:



There's lots good to say about the chart, particularly from the top and the bottom. The RSI line at the top shows the indicator at its highest level this year. The price of gold has advanced and retreated several times this year, but it never got close to the oversold level of 70 that it used to reach ack in '09. It hasn't gotten there yet, but it's close. Seeing the RSI move above 70 before this advance pulls back would be an important milestone, as doing so is consistent with a bull trend.

On the bottom, the MACD lines have moved up to a higher level than they were as of January 11th, the day with the second-highest interday high. I know I've been second-guessing this rally for most of its duration - once again, I admit to being surprised - but a decline on Monday would actually mean less harm for the nascent uptrend than it would if, say, one had taken place yesterday. To put it into perspective, a fall of $20/oz would leave gold at the top of the now-broken $1,060-$1,140 trading range. A monster plummet like the one on February 4th, which would be sure to exhaust any latent bearishness in the metal as Feb. 4th's did, would still leave gold well above $1,110. If gold lost $40 over a grinding several sessions, as it did after its 5-up-day rally at the end of February and beginning of March, then it would still be left at just below its March 16th-19th stalled high. Any one of these outcomes would leave gold in a high enough position to confirm a genuine short-term uptrend. The metal's gone too high for any downtrend as bad as any prior one this year to erase its gains completely.

And, as of now, there's less reason for gold to do so. Even matching 2010's worst downturns would require a real blindsiding from a market-shaking announcement. Come the downturn, its bottom would be easy for a real advisor to interpret.

I concede that gold may continue to advance on Monday, which would make the above sketch-out even more inclined towards "new uptrend." For the end of this week, I'll content myself by noting, again, that the rally's got to end sometime. In retrospect, the drop below $1,100 on March 24th was a huge fake-out.

The metal's ensuing rally, when combined with the Commitment of Traders tabling of positions as of last Tuesday, lead to a sight not often seen on the commodity markets: the non-commercial longs, the proverbial sheep, growing more numerous at the right time to do so. From March 30th to April 6th, as gold's COT graph shows, non-commercial longs increased by 32,428 contracts or by 15.5%. The period measured by the COT report ended when gold itself ended at below $1,135.

Commerical longs decreased by 8,802 contracts, or by 6.50%. Commerical shorts increased by 28,413 contracts or by 5.94%. Non-commercial shorts increased by 2,748 contracts or by 7.61%. These three groups are traditionally held to be cannier than the non-commerical long cohort, and yet they were the ones caught flat-footed by the rest of the week's action. An unusual configuration to festoon an unusually bullish week. Pit tradition is there for a reason, which inclines me to - well, I'm sure you know by now. I add, though, that the normally more credulous crew being on the right side of the turn is added evidence of a change into a genuine uptrend. Given the run itself, where it's at now, the lancing of the ceiling that's been there since year's beginning, that COT is one of several pointing to the same conclusion. In the short term, at least, the gold bull is back.

On Tuesday, the day of this week's COT for the U.S. Dollar Index, total open interest shrunk by 10,217 contracts or by a large 17.6%. Commerical longs hardly changed, but non-commercial longs shrunk by 10,766 contracts or an even larger 23.4%. Interestingly, non-commercial shorts shrunk by an even greater percentage: 53.1%, more than half. Commercial shorts shrunk by 12.5%. The Index rallied subsequently until today, when it ended below Tuesday's closing figure. The overall picture from this week's COT is uncertainty mixed with caution. A lot of contracts got out of Dodge from March 3oth to April 6th.

I can't add much to the above as this week turns into the next. All I can say, to those who have some gold or gold-related positions, that I hope you weren't scared out two weeks ago and have held on to enjoy the fruits of this run. If you had the courage to go in when gold was below $1,100, I salute you. And, whatever your portfolio and decisions, I'd like to wish you all the best this weekend and thank you for stopping by.