Gold Sinks In Post-Crisis Hangover

The uprising in Egypt is still there, but it no longer carries the same shock that it did on Friday. Moody's has responded to the crisis by cutting Egyptian government debt a notch to Ba2 from Ba1 and added a "negative" outlook rating instead of the "stable" one that used to be there. Gold initially rallied a few dollars after the week's trading resumed last evening, but that jump was short-lived. After pulling back, the metal stayed stable until just before midnight when it dropped eight dollars before bouncing back to the early-morning high of $1,339.80. Made around 3 AM ET, that top gave way to a bottom of $1,324.40 reached four hours later. Again, gold went through an early-morning decline - but this one bounced off the new-restored $1,325 support level. After that bounce-off, $1,330 yielded to another advance that held until just before regular trading started. As of 8:03 AM, the spot price was $1,330.90 for a drop of $7.50 on the day. The Kitco Gold Index attributed -$13.25 to predominant selling and +$5.75 to a weakening greenback.

Gold lost some of its crisis premium, but the U.S. Dollar Index lost all of its. Starting at above 78.2, and fluctuating betwen that level and 78.3 in the early evening, it sunk for the rest of the overnight session. Despite an upwards reaction from 78.0 to 78.2 that started at 3 AM, the Index's sinking accelerated in early morning. As of 8:20, it was well below 78 again with a value of 77.78.

A Reuters report suggested that the morning fall shows that Friday's safe-haven buying was a temporary phenomenon.

Gold is set for its worst monthly performance since December 2009, driven down by the improving tone of some key U.S. economic data, growing investor confidence and a near-record decline in holdings of metal in exchange-traded funds.

Even a 2.6 percent fall in the dollar index .DXY has not lifted gold this month, as the traditional negative correlation between the two has reached its most positive since mid-September....

"What we've seen is (Egypt) has limited the downside morethan anything," said VTB Capital analyst Andrey Kryuchenkov.

"Technically, it's still weak, also I think the investment community realises Egypt is probably a temporary thing, something will come out of it, even if no one knows exactly what that will be, more compromise from the government for example."

The article also quotes Edel Tully as saying she favors industrial metals for now, but she still believes that gold will win the day later. In addition, it notes that holdings of the SPDR Gold Shares Trust (GLD) dropped to 1,224.118 tonnes on Friday. On the other hand, premiums for physical gold are still high in Asia.

An earlier Bloomberg report said Friday's rise shows that Thursday's "capitulation" is over.

“The capitulation is over,” said Tom Pawlicki, an analyst at MF Global Holdings Ltd. in Chicago, who correctly predicted in September that the metal would keep rallying to $1,350 an ounce after reaching a record. “The liquidation has washed out the weak trades and put gold at a point that looks attractive to new buyers.”...

Gold’s rebound from the 150-day moving average of about $1,306 is a sign that prices are poised to rally, said David Hightower, the president of the research firm based in Chicago. The metal may climb to $1,630 by the end of June, he said....

“People take these longer moving averages as a key measure of confidence,” said Hightower, who correctly forecast that gold would rally above $1,400 last year. “Gold has respected the 150-day average in the past. By repelling from that level, it suggests that gold has value, and that the bull camp was not scared and forced out of their positions.”

Despite Friday's rise, holdings in ten gold ETFs tracked by Bloomberg fell to 2,033.8 tonnes for the lowest total since last June.

A Wall Street Journal article notes the hangover effect, but says that gold shouldn't be that volatile in part because of a shutdown in Chinese markets due to the New Year's Festival.

"Gold shouldn't come down that much in the next few days and weeks, as it is well supported by demand as a safe haven due to current tension in the Middle East," said Daniel Briesemann, an analyst at Commerzbank.

However, trading should be quieter than usual this week, because China shuts down for the Lunar New Year, noted analysts.

Moving back to more quotidian U.S. economic data, December consumer spending was up by an expectation-beating 0.7%, with personal incomes up 0.4%. The savings rate fell from 5.5% to 5.3%, and core personal-consumption inflation was reported as flat for December and up 0.7% for the entire year. [I know, but that's the reported figure.] Before the data were let out, gold fell to the high 1320s but stayed flat at the time of release. As of 8:44, the spot price was $1,327.70 for a drop of $10.70 on the day. The Kitco Gold Index assigned -$18.70's worth of change to predominant selling and +$8.00's worth to greenback weakening. The U.S. Dollar Index continued to sink, reaching 77.69 at 8:46.

The post-shock letdown continues, but gold is back to where it was before Thursday's plummet. $1,325 is again active as a support level even though investment demand is still whittling away. How far the whittle goes will be evident this week; there's still evidence showing physical demand in Asia is still strong.