Gold's Morning Jump Turns To Fall

It was an exciting early morning in the gold market, as the metal went for a nice run that took it up to $1,394.10 by 9 AM ET. Unfortunately, that run-up melted away into a range centered at about the level gold was at before the pit session started. An outright decline hit the market post-pit, dragging gold down to a double-digit loss by the time regular trading was over.

A spate of economic data released at 8:30, most notably the initial jobless claims report which showed a bad-news spike-up to 445,000, gave the fuel to push gold up to the $1,394 level. Initially, the metal blipped up and pulled back as if it had made a false start. The released data kept it going for another half an hour.

Then, the spike-up gave way to a thud that took gold down to $1,380. After that erasure, the metal initially stayed in a $1,380-$1,385 range and later hugged the top end of it. As the pit session went to its end, the metal centred on $1,385. At the end, or 1:30 PM, the spot price had blipped up to $1,387.10 for a drop of only 90 cents on the day. The Kitco Gold Index attributed -$17.30 to predominant selling and +$16.40 to weakening of the greenback.

Shortly afterwards, though, gold began descending. The start of the fall coincided with a speech by Ben Bernanke to an FDIC forum on small businesses. One of the points he made was that QE2 had been good for the stock market. Whether or not true, his speech was truly not good for the gold market. The rolling decline didn't bottom until 3:40 when the metal hit $1,368.60. It was only then that a sustained push-back lifted it to near $1,375. At the end of regular trading, the spot price was $1,374.00 for a loss of $14.00. The Kitco Gold Index assigned -$29.40 to predominant selling and +$15.40 to greenback weakening. What started off as a good day turned into a bad one.

The metal's six-month chart, from Stockcharts.com, shows the drop still leaving it in its 1+ month range:



Today's decline erased the last two days of gains, but the close has yet to approach the danger zone that would signal a breakdown of the range. The technical picture is still clouded, and there is a possibility that gold will spike down below the $1,365 floor. However, given solid physical demand, an outright breakdown isn't likely at this point. It remains to be seen what Asian buyers and sellers will make of this fall. As for the techncial indicators, their cloudedness is characteristic of a range.

Gold was hit, but the U.S. Dollar Index was hit even more today. This session's activity was uncannily like yesterday's: a steep morning drop followed by a small recovery. This day, the decline started a little earlier but it stretched right through the morning to early afternoon again. From almost 80 as of 7:10 AM ET, the Index tumbled to just below 79 as of 12:35. Again, a full point was lost in the morning decline. 79 held as a support level, but a subsequent slight upward drift got the Index only up to 79.25. A late-afternoon pullback to to below 79.15 left the Index at exactly that figure at 5:30.

Its own daily chart, also from Stockcharts.com, shows the Index shooting from near the top of its range to the bottom in only two days:



There have actually been four days of declines, but the first two were small compared to yesterday's and today's. Anyone who had shorted the greenback has had good reason to congratulate him- or herself. Now that it's at the bottom of its range, any further decline is going to bump into some support. As with gold, the Index's technical picutre is muddied because of its range-bound behaviour.

Given that both gold and the dollar got swacked today, the most logical guess at the cause is the Euromess once again fading from sight. That guess is close, but the Wall Street Journal said the reason was a reassessment of U.S. economic data; in retrospect, things were looking better than assumed in the 8 o'clock hour. Hence, the wilting of both safe-haven trades. Given the greenback's plummet this morning, which continued irregardless of gloomy or sunny interpretations of the data, it's likely that both factors had a hand.

As noted above, what to watch for overnight is the reaction of Asian buyers to today's drop. At these levels, solid buying has provided support in the recent past. In India, this has largely been due to stockists stocking up for harvest season - but there were signs that they pulled back last night because of higher prices. That behaviour may change tonight.