Bottom Falls Out As $1,325 Is Penetrated Decisively

I have to admit I didn't see this coming. After surging up yesterday afternoon, and giving back the surge early this morning, gold marked time until 11 AM ET when it plunged down. The damage done was added to after the pit session ended, leaving gold with a more than thirty dollar loss on the day. $1,325, the support level that the metal used to bounce off, was breached; technical selling added to the damage once that former support level was penetrated.

The jump in the initial weekly jobless claims number added some heft to gold when it was released at 8:30, but the jump from it was short-lived. A more durable lift came after 9:00, which saw gold hug $1,335. After 10:00, the metal eased down for the first hour in a roller-coaster decline that turned into the plunge at 11:00. Within a half an hour, it was below $1,320. A pause that saw it hover around that level began to break down before the pit session was over. At the end, or 1:30 PM, the spot price was $1,319.20 for a drop of $26.90 on the day. The Kitco Gold Index split the loss into -$25.95 for predominant selling and -$0.95 for a strengthening U.S. dollar.

The breakdown continued during the electronic-trading hitch. Although slow, it was steady; gold didn't stop falling until just after 3:30 when it bottomed at $1,309.60. After licking its wounds, it rose slightly to end the day with a five-dollar subtraction from its loss at 3:30. At the end, the spot price was $1,314.90 for a drop of $31.20 on the day. The Kitco Gold Index attributed -$31.70 to predominant selling and +$0.50 to a weakening greenback.

Today's decline was severe, as gold's 6-month chart (from Stockcharts.com) shows:



Not only was yesterday's gain obliterated, but the $1,325 support level was also vapourized. Gold is now at levels not seen since the beginning of last October. Needless to say, the chart is now bearish.

The question the chart can't answer is: did gold have a climax selloff, or is the near-term bottom still a long way away? Really, no-one can answer that question; it's only evident in retrospect. Unless $1,325 is recovered, the next stop down is $1,300.

The U.S. Dollar Index ended up down also, but by only a smidgen compared to gold. For a lot of the regular trading day, it had been up. An early morning bounce-around was followed by a late-morning jump that failed to get the Index up above 78. It faded in early afternoon and sailed down into a ragged range between 77.7 and 77.75. As of 5:30, it was at 77.715.

Its own six-month chart, also from Stockcharts.com, shows its fifth decline day in a row:



Today's drop was larger than yesterday's, but the last three until today were mild. Like gold, the Index is suffering from diminished safe-haven demand as equities capture the wallet. It can't keep falling forever, of course, but the chart still looks bearish.

As the lustre comes off gold, bargain hunters are no longer stepping up to cushion any decline as they used to. This day is ripe for further downward price acclimatization to set in, as it already had last night. Depite the gloom, though, gold's long-term bull market is still intact. This phase is one of many corrections and consolidations; at some point, bargain hunting will prevail for sure and gold will wait for the next upward roll. As noted above, there's no way to determine when the bottom will be reached - but reached it will be. Veteran gold bulls have seen this before, most recently at about this time last year. This too shall pass.