Thursday, January 20, 2011

Gold Ends Just Above Morning Plummet Low

Yesterday, the U.S. Dollar Index broke through its range on the downside. Today, gold joined it. A morning plummet, prompted in part by good initial jobless claims data out of the U.S. and in part by a revitalized greenback, took the metal down to the $1,345 level. Attempts to get back and stay above the $1,350 support level fizzled; the metal ended up sporting a loss of almost twenty-five dollars.

It started drifing down right around midnight ET, but that slump was relatively gentle compared to what got started at 7:45. Worries about the implications of mainland China's good growth rate trumped yesterday's well-received below-expectations inflation data. Hopes that the People's Bank of China would stay the hand that's tightening, faded as China's white-hot growth number sunk in. Good news on the U.S. economy added to the fear, as the retreat turned into a rout around the 8:30 release of the jobless-claims data. As of 8:45, gold was well below $1,350 and touching $1,346.

An hour's worth of muddling, including a false start downwards, gave way to a new low. 10:25 saw the day's low of $1,342.50 made. A relief rally got rolling, but it exhausted itself after plowing a little above $1,352. The former $1,350 support level had become a resistance level. The metal gave up around 1 PM, and fell to a range between $1,346 and $1,348. As of the end of the pit session, or 1:30 PM, the spot price was $1,347.30 for a loss of $23.20 on the day. The Kitco Gold Index split the loss into -$17.85 for predominant selling and -$5.35 for a strengthening greenback.

As for the electronic-trading hitch, it saw another relief rally in mid-afternoon that also failed to take. Peaking at $1,353, it exhausted itself between 3:00 and 4:00; the metal again descended to the mid-1340s. The last hour and fifteen minutes saw virtually no change at all; everyone, even short sellers, seemed to give up and call it a day. As of the close, the spot price was $1,345.60 for a drop of $24.90. The Kitco Gold Index divided the day's loss into -$21.30 for predominant selling and -$3.60 for greenback strengthening.

Its six-month chart, from, shows the metal breaking through its support:

That saw-through is pretty unambiguous. It also makes for a short-term downtrend of a lower high followed by a lower low. The next stop is $1,325, a support level that's held since last October.

Given that breakdown, the bearish configuration of the Moving Average Convergence-Divergence lines at the bottom of the chart has to be reckoned with. Both have been falling steadily since gold last peaked; the black line is underneath the red line, in line with a bearish interpretation. The Relative-Strength Index (RSI) line at the top of the chart shows a similar downward trend. If there's any hope for the latter, it would be the fact that the RSI is approaching oversold levels.

The overnight response from Asian buyers will tell a tale. If they hold off, waiting for prices to go lower, it's likely that $1,325 will be tested. If they jump in, seeing an unambiguous bargain, there's a real chance for gold to get back up to $1,350 or at least stay where it is. Signs in India suggest that stocking up for harvest season is largely done, which doesn't bode very well, but that dwindling could be overcome by today's lower price.

After its own breakdown yesterday, the U.S. Dollar Index managed to climb above its 79 resistance level for a time. Prompted by the same data that drove gold down this morning, the Index reversed its below-78.5 slump at the same time gold began caving in. Getting above 79.15 at 11:00 after a two-stage advance, it subsequently slumped back but not that far. By mid-afternoon, it was creeping upwards within a range between 78.75 and 78.85. As of 5:30 it was at 78.805.

Its own six-month chart, also from, make its recovery look a little questionable:

Its temporary recovery above 79 shows, but so does its close below that level. Its own Moving Average Convergence-Divergence lines still show a bearish configuration. There are cases when an asset falls below a major support line only to drift back up to it. That recovery doesn't change the bearish thrust, it only gentles the downwardness. The Index may continue to ford upwards on more hope signs, but it has a strike against it right now. Further good news from the Eurozone would endorse the downtrend (and be bad for gold too.)

Unfortunately, today was a bad day for the metal. Its fall from $1,425 from the beginning of this month is beginning to hint of correction. The long-term bull market is still intact, but it looks like the metal is going through one of those unnerving consolidation phases that typically follow a good round of gains. Asian demand will give an important clue tomorrow about gold's fate.

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