Gold Takes A Tumble

I have to admit to not seeing today's decline at all. Prompted by a rise in the U.S. Dollar Index, itself pushed upwards by continuing Greece-related troubles and encouraging economic data, gold dropped in two stretches during morning trading. At the beginning of the pit session, it was around $1,144. When both declines were finally over, gold had sunk to below $1,131.

The first decline was relatively slow, taking the price down to $1,138.50 in the first half-hour of regular trading. After a slight recovery, and a wobble around the $1,140 area, the metal managed to climb up to $1,142 before it was hammered. Within ten minutes, it dropped eight dollars an ounce to $1,134. Again, it hovered around the bottom price; this time, though, it made a new bottom at $1,130.80 before spiking up to $1,134. After some meandering, and despite a lesser spike-down, the metal got up above $1,136 before pulling back a little. As of 11:54 AM ET, the spot price was at $1,135.50 for a drop of $10.70 on the day. The Kitco Gold Index split the loss into -$6.10 due to strengthening of the greenback and -$4.60 due to predominant selling.

The U.S. Dollar Index had a good morning; it vaulted easily above 81.5. Starting the regular session below 81.4, it moved up in a two-stage rally to above 81.7 by 10:05 before pulling back somewhat to the 81.55 level. Subsequently, it recovered to around 81.65 and carved out a trading range between that level and 80.6. As of 11:55, it was at 81.64.

So far, today hasn't been a good one for gold. The only upside is the chance that bargain hunters will come in and prevent any further declines. That's what we may see this afternoon.


Update: The morning drop was mostly erased as the pit session came to a close. Gold got above $1,140 again.

After bouncing around $1,136, the metal jumped up to $1,138 only to fall to below $1,135 as of 11:50 AM ET. From that point, gold managed a nearly hour-long rally that took it up to $1,144. That level failed to hold, but the pullback brought it to around $1,142; it's been near that level since 1 PM. As of 1:46, spot gold was at $1,141.10 for a loss of $ on the day. The Kitco Gold Index attributed +$0.35 to predominant buying and -$5.45 for strength in the greenback.

The U.S. Dollar Index largely treaded water in this part of the session. There was a slight pullback to the 81.55 level, but 81.5 has remained out of reach. As of 1:47 PM, it was at 81.57.

Partial erasure of the decline was good news for gold, as it suggests that this morning's plummet was overdone; that plummet was erased in its entirety. The rest of the afternoon session is likely to see $1,140 hold.


Update 2: It did, as did a trading range between $1,140 and $1,142. At the end of the day, the metal closed at a price only slightly below the one at the start of the mid-morning plummet.

Not much happened in the post-pit stretch of regular trading, which can be seen as some good news. There have been stretches where the price has declined a bit after a substantial advance; today's wasn't one of them, perhaps because gold closed at a loss. As of its close, spot gold was at $1,141.30 for a drop of $4.90 on the day. The Kitco Gold Index assigned a +$1.40 change on the day to the predominant-buying category and a -$6.30 change to the strengthening-greenback category.

Gold's action may have been nearly nonexistent mid- and late-afternoon, but the U.S. Dollar Index's wasn't. After declining below 81.6, the Index rallied through the late afternoon with barely a pullback until it hit 81.7 as of 4:40 PM ET. A less insubstantial pullback dropped the Index below 81.65, but a recovery near the end pushed it up. As of 5:30 PM, the Index's value was 81.67.

Its daily chart, from Stockcharts.com, shows its one-year record extending for another day. It's now has six consecutive up sessions:



And the 81.5 resistance level was bested - on something more than rumours this time. There's some dirty laundry creeping out of the Grecian government's file cabinets. This time, it pertains to the real size of the deficit in relation to Greece's GDP. As the talks progress, there may be more. Given the dog-and-pony show that's been going on there, it's not too surprising in retrospect that some unmentioned mentionables have now seen the light of day.

The possibility of the deficits being even larger, or of other snags in the works surfacing, will likely give more boost to the Index. It's going to be a long two-to-three weeks for greenback bears.

From the technical standpoint, the Index looks pretty good. As mentioned above, the 81.5 resistance level was crossed. Now, the chart looks well into the process of forming an inverse head and shoulders pattern; that formation is bullish. The Index may well descend soon. Unless it drops to 80 or below, though, that descent is likely to preface a run-up above 81.5. Also looking bullish is the crossover of the MACD lines from a bear configuration to a bull configuration.

The last crossover of that sort didn't last long, but the bear phase that just ended started when the Index was slightly below today's level. In other words, if someone had bet against the MACD bear crossover by going long the Index on the day the crossover was made, (s)he would be closing out with a slight profit if not margin-called out. If a little money can be made by going bullish when an indicator goes bearish and closing the long position when the indicator turns bullish again, then the long-term orientation of that investment is bullish. It's true that going long in harmony with the MACD's previous bull phase would have resulted in a small loss: both topsy-turvy results from both phases may simply impugn the MACD's effectiveness as an indicator at this time.

The impugnment has been lopsided, though. Over the course of the last four-and-a-half months, going long when the MACD indicator tells you to would have led to a substantial profit in most cases. The returns from going short when the MACD lines crossed over in a bearish fashion would have been spotty. Given this lopsidedness, the lines tend to be more trustworthy when they signal "bull." The Index may be in for a run upwards, although not immediately.

It doing so would, of course, put a headwind opposing any upward march in gold. The metal's own daily chart not only shows the $1,140 level holding up, but also a deep interday decline which reflects the mid-morning plummet:



A successful test of a support level is grounds for optimism, but the metal's own MACD indicator has spent its second day in a bearish configuration. Given the greenback's rallying power, it's not difficult to see why. I have to admit to being blindsided today; yesterday's wrap-up proved to be too optimistic.

Even if the decline continues, however, gold isn't that far away from bargain levels. A short-term decline to $1,120-$1,125 may be in the works, but I don't see any decline going much further than that. The Eurocrisis is benefitting gold ex-greenback; the metal is getting a share of safe-haven money, particularly when the costs and effects of fixing things up sink in. Moreover, I've read of that range being the bargain zone for Asian (particularly Indian) wholesale buyers. It seems to be for other participants. Gold could get hammered successfully tomorrow, in the sense of the plummet sticking, but there doesn't seem to be too far to go before the bargain range is entered. The only way the metal could get down to $1,100 would be a large hammering that scares or encourages bargain hunters into lowering their buy points to that level or below. Possible, but not likely.

The regular end-of-pit-session wrap-up from Reuters attributes the metal's drop to the usual suspect. Amongst other points, these were therein:

* Gold hammered earlier in the session as worries over Greece's ability to pay its debt led to a broad sell-off.

* Euro plunges to lowest level since May against the dollar after Moody's cut Greece's rating by a notch and placed the rating on review for further downgrade.

* Gold market largely ignores benign inflation pressures. U.S. data showed increase in wholesale prices in March was 0.7 percent.

* Gold holding up well despite dollar rise and liquidation pressure in an overly long futures market - COMEX floor trader Jonathan Jossen.

It's held up so far, anyways.

I wish I could be as cheery as I was yesterday, but I doing so got a little egg on my face. Despite a strong test of the $1,140 support level today, it held up. Gold may hold up tomorrow, particularly if the U.S. Dollar Index takes a rest from its current climb. Tomorrow's session will tell the tale.