Wednesday, January 26, 2011

Boosted By Fed Unanimity, Gold Closes Up Strongly

There had been a premonition of gold's strong rally by it staying mostly above $1,330 in the regular trading session and entirely so in the pre-regular morning hitch, when it's been prone to sink lately. Until the Fed's announcement, though, that steadiness would have been little more than a respite. The FOMC is now unanimously behind the near-zero interest rate policy and Quantitative Easing II. No dissent this time, not even because of commodity prices rising. The FOMC had decided that underlying inflation is trending lower, and that's that. The gold market was loving the decision, leaping up from near-unchanged when the announcement hit the Net and continuing upwards to a double-digit gain with only one look back. Although still below $1,350, the metal had turned in the tide.

Despite a blip-up to $1,335 at the start of the pit session, the trend until just after 11 AM ET was downwards. From a range between $1,330 and $1,335, the metal ended up sinking below the floor and touching $1,325. The low of $1,324.20 put in, it then turned upwards and sailed fairly smoothly back up to $1,135. As of the end of the pit session, or 1:30 PM, the metal had fallen back a little; its spot price was $1,333.80 for a small gain of $1.00 on the day. The Kitco Gold Index attributed +$1.90 to predominant buying and -$0.90 to a strengthening U.S. dollar.

Putting ten dollars on the price in the latter half (or so) of the pit session made for a good run, but gold had more to show when the electronic-trading hitch began. Continuing to slide down to the lower 1330s, gold paused in its tracks at 2 PM as traders awaited the Fed announcement. Once gotten, the metal jumped up about five dollars only to pull back to where it was. The $1,335 ceiling being broached, the metal then climbed steadily until marking time at 4:30. At the end of the regular day, the spot price was $1,346.10 for a day's gain of $13.30. The Kitco Gold Index split the gain into +$10.40 for predominant buying and +$2.90 for greenback weakening.

The metal's six-month chart, from, shows the downtrend has indeed reversed:

But - the question almost asks itself - for how long? The day's gain was solid enough to reverse the last two days of losses, but the chart still presents a bearish picture for now. The only hope, ironically, comes from the Moving Average Convergence-Divergence lines at the bottom of its chart. Although the black line is well below the red line, showing a bearish configuration, the extent and length of both lines' slumps is reminiscent of late July, when gold shook off its consolidation and began rolling upwards. This time, it's different because the current consolidation hasn't lasted that long. As of July, the last consolidation was more than seven months old; this one's much younger. The Fed's unanimity has catalyzed the end of a drop, but I don't expect it to have catalyzed a true turn of the tide. Gold needs more of a breather.

As for the U.S. Dollar Index, it spent the day flailing between 77.75 and 78.05 until near the end, when it sunk below the lower level. The biggest flails came right after the Fed announcement, when it first dropped to the bottom of the range and then jumped up to almost 78.1 in the space of ten minutes. It then fell back into the range, where it remained until breaking down at 4:45. As of 5:30, the Index has recovered to the range bottom at exactly 77.75.

Its own six-month chart, also from, shows the Index's decline (unlike gold's) is still in place:

It's now racked up four trading days in a row of declines, and has settled below its former support level of 78. This decline has been more sedate than September's, but a decline it still is. The Index's 200-day moving average, drawn in red in the middle of the graph, is sinking and has been since late October. Nearer-term, the chart is still bearish as its RSI line (at the top of its graph) approaches the oversold level.

Today's march upwards broke the string of disappointments that gold has suffered recently. In so doing, the metal has cleared the $1,325 support level which has held firm. Unless there's a climactic sell for some reason, like more proactive tightening moves by the People's Bank of China, gold should stay in the lower part of its $1,325-$1,425 range. I wouldn't be surprised to learn of continued strength in Asian physical demand in the overnight session as a result of the metal bottoming at $1,325. Today was the kind of day that puts the question mark on hopes for a further decline.

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