Gold Sags In Early-Morning Trading

An attempt was made to get above $1,345 yesterday evening, but was defeated before that level was reached. In its wake, gold slumped into the high 1330s but pulled back up above $1,340. That's where it stood as of midnight ET, when it started slumping again. Staying in the high 1330s until 6:30 AM, it sagged further but didn't drop definitvely below $1,335. As of 8:10, the spot price was $1,336.00 for a drop of $5.90 on the day. The Kitco Gold Index split the loss into -$4.40 due to predominant seling and -$1.50 due to strengthening of the greenback.

The U.S. Dollar Index at first muddled along, then dropped below 77. For a time, it fluctuated between that level and 76.9. Then, mounting a mild recovery that pulled it above the higher level, it pulled back down into the range and then pulled up well above 77. As of 8:16, it was at 77.13.

A Bloomberg report said that the recovery trade whittled away at demand for gold.

“A change in investor sentiment toward risky assets” may pressure gold, Tom Pawlicki, an analyst at MF Global Holdings Ltd. in Chicago, said today in a report. “Risk-taking has been the name of the game recently, as economic data has surprised on the upside.”...

The manufacturing data [released yesterday morning] removed “some of gold’s safe-haven appeal as risk appetite improved,” Mark Pervan, head of commodity research at Australia and New Zealand Banking Group Ltd., wrote in a daily report today. Political tensions in the Middle East “could be supportive” for gold, he said.

Also, holdings of ten gold ETFs tracked by Bloomberg continued to drop. For yesterday, the total shrank by 2.47 tonnes to 2,028.74 tonnes.

A Reuters article concurred with the recovery-trade thesis, noting the impact of good corporate earnings as well as good economic data.

"We still think there are reasons to see higher gold prices through this year, but right now the slew of positive macro data particularly coming out of the United States ... is all very encouraging (for the wider economy)," said Societe Generale analyst David Wilson.

"It seems to be that the positive global macro data is balancing regional risk from Egypt."

World stocks hit 29-month highs on Wednesday, with strong factory data pointing to sustained global economic recovery and positive corporate earnings fuelling gains....

"Investors are still reluctant to jump back on the market, expecting little upside for gold should risk aversion retreat, while major central banks will eventually have to turn back to tackling inflation and reducing liquidity," said VTB Capital.

A Wall Street Journal article also concurred with the above explanations, particularly the recovery-trade drag.

"Gold is in a period of reassessment, as the market tries to work out what the metal's prospects are for the rest of the year," said a London trader.

"While the beginning of the year saw investors wondering if gold's safe haven prospects were finished, problems in Egypt served as a reminder that things can go quickly wrong," he added....

"Gold movements are likely to remain very erratic," said a trader.

But a deeper correction may be prevented by the continued strength of physical demand in India, said analysts.

The article notes that physical demand has come in at a time when investment demand is tailing off, and quotes Edel Tully as saying physical demand has saved gold from a drop below $1,300.

ADP released its January payrolls data, which showed private-sector employment rising by 187,000. The gold market liked the number, rsing to the upper end of the 1330s in the wake of the news. As of 8:40, the spot price was $1,339.20 for a drop of $2.70 on the day. The Kitco Gold Index divided the loss into -$2.20 for predominant selling and -$0.50 for greenback strengthening. The U.S. Dollar Index tailed back a little, but stayed fabove 77. As of 8:43, it was at 77.06.

From a longer perspective, today's sag in gold is a muddle-through. There's nothing to move it up right now, but the recovery headwinds aren't moving it down all that much. The Egyptian turmoil, settling down as it is, woke gold buyers up and did stop what could have been an all-out correction. Good economic news is still arriving, but the gold market is taking those items in stride. The muddle-through is continuing, but another run to $1,345 shouldn't be written off.