One Slide After Another

Today was not a good day for gold, as the slide that began early this morning gained momentum throughout the pit session. The first leg of the drop began when the London market opened, and was ascribed to U.K. dealers coming back from the holidays. Unfortunately, that early-morning slide proved to foreshadow further drops that left the metal down more than thirty dollars on the day.

When the pit session opened, gold was close to $1,410. A quick drop below $1,400 ensued, propelled by the earlier drop in the London market. A second stage had done its damage by the time the U.S. factory orders were released. The metal paused when the higher-than-expected 0.7% rise was disseminated, but the indication of a growing economy didn't help sentiment. Added to that piece of news was an upwards revision of October's number: from -0.9% to -0.7%.
The next stage in the decline, coming at around 10:30 AM ET, was muted; gold practically recovered and stayed stuck around the $1,385 level until 12:30. Then, another sell-off pushed it down to its day's low of $1,374.00 before the carnage finally ended at 1:00 . A Wall Street Journal report attributed the decline to traders taking profits to start off the new year.

By the time the pit session ended, the damage was done. As of 1:30 PM ET, the spot price was $1,378.00 for a loss of $36.00 on the day. The Kitco Gold Index split the loss into -$3.50 for a strengthening U.S. dollar and -$32.50 for predominant selling. Strength in the greenback did contribute to the negative sentiment, although it was more reflective of better economic prospects than anything else.

In the electronic-trading hitch, the metal licked its wounds and slowly inched up. The release of the Fed minutes for last December 14th, which showed solid support for QE2, had little effect on the gold price. For most of the afternoon hitch, the metal slunk around $1,380 although it rose a little near the end of regular trading. At the end, at 5:15 PM ET, the day's loss was pared somewhat to -$33.30 on the day with a close of $1,381.30. The Kitco Gold Index divided this end-of-day loss into -$4.50 for greenback strength and -$28.80 for predominant selling.

The metal's longer-term chart, from Stockcharts.com, shows gold being knocked back to the lower part of a range established over the last month:



As it turned out, the lower highs of the Relative Strength line at the top and the Moving Average Convergence-Divergence lines at the bottom ended up being prescient. Both have diverged from gold's higher highs since October, although those divergences in and of themselves aren't definitive: gold still made a new record high last month despite them. They do, however, indicate a rally that's tired out. Despite all the optimism still being expressed, gold may have a way to go before a true buying opportunity is reached.

Gold's pain was in part reflected by the greenback's gain. The U.S. Dollar Index made the bulk of its gains in ealy morning, though; after touching 79.51 around 11:10, the Index pulled back a bit and basically traded sideways for the rest of the regular trading day. The range narrowed a bit due to the bottom getting higher, but it didn't mount any sustainable rally above 79.5. As of 5:30 PM, it was at 79.445.

Its own six-month chart, also from Stockcharts.com, shows a continuation of yesterday's recovery:



Still, its short-term technical position doesn't give cause for much optimism. The Index is still showing lower highs followed by lower lows. It would take a rally up above 81 for that pattern to be broken.

Turning back to gold, its own hammering may only be due to profit-taking and asset deployment to (say) equities, but there is a fair amount of background optimism out there still. A contrarian would take note and be wary. If today's rout was just a spill, the metal should quiet down tomorrow and start inching back up again. That kind of action would keep the range and forestall a flood of momentum selling.