Wednesday, March 9, 2011

Gold, After Buffeted By Fear Of Fed Tightening, Closes Up

The edge in the Libyan civil war is shifting to Gadaffi's forces, for now, and the two sides seem to be stalemated. Having become inured to the fighting, the gold market was temporarily toppled by worries that the Federal Reserve will not pursue further quantitative easing once the current QE2 program is done. As reported in the Wall Street Journal, Bill Gross' PIMCO got rid of all its Treasury bonds from its flagship Total Return Fund shortly after gold hits its daily high of $1,437.10. That move prompted speculation that the Fed will no longer support the price of T-bonds, which is being interpreted as constructive tightening. As a result, the metal skidded downwards in the morning with only a partial recovery in the afternoon. Evidently, the gold market is nervously scanning for any sign of real tightening. A last-minute blip-up got gold closing with a small gain on the day.

Its day's high was made just before 8:30 AM ET. From then, it initially hovered but began to fall to earth an hour later. In a two-stage slide, broken by a recovery rally between 10:00 and 10:30 that got it back up to $1,434, gold descended to its regular-trading low of $1,425 by 11:30. Despite that slide, $1,425 ended up holding more solidly than it did a little after midnight this morning. The U.S. Dollar Index showed little correlation with gold in the first stage of its decline, but rallied while the metal was falling in the second stage. This rally started after gold resumed dropping, so (if not coincidental) the causative chain went from gold's fall to the greenback's rise. This sequence is consistent with gold selling off because of Fed-related tightening fears, which would benefit the greenback.

With $1,425 holding, a slower but more durable relief rally gave gold a lift in early afternoon. A jump to $1,432 just after 1:30 held for a half an hour but gave way later, pushing gold to a little below $1,430. Hovering around $1,329 in later afternoon, gold's steadiness prompted a last-minute rally that surmounted $1,430. As of the close, the spot price was $1,431.10 for a gain of $2.20 on the day. The Kitco Gold Index split the gain into +$0.30 for predominant buying and +$1.90 for weakening of the greenback.

Gold's six-month chart, from, shows the metal still lingering at the crest of its recent bull run:

It seems suspended at its height, with recent action appearing inconclusive from the six-month perspective. There are still fears of a downturn, or hopes if bargain hunting is considered, but so far the $1,425 support level has been fairly resilient if not completely solid. Nervousness is beginning to show up without any solid decline to back it up, suggesting any pullback by the metal is going to be short unless it turns into a self-fulfilling prophecy. In the latter case, the decline would be short and scary like Jan. 27th's climactic bottom. In the absence of any real bad news for gold, it's likely to continue consolidating. What's interesting is the fact that the metal has no enthusiasm to work off despite it being within twenty dollars of its record high. Predictions for gold to break upwards are hard to find, if any exist at all.

As for the U.S. Dollar Index, its rally this morning was far choppier than yesterday morning's and ended at a lower peak than yesterday's. Barely getting above 76.8 at 12:50, the Index turned down as it did yesterday and settled into a sideways line. Today's line, centered around 76.61, was too raggedy to be a true range; it narrowed as mid-afternoon turned into late. As of 5:30, the Index was a little above the centre line at 76.62.

Its own six-month chart shows today's action as ending in a loss, after trying but failing to rally above its 77.0 resistance level:

So far, this countertend snapback hasn't been as vigourous as the one in early February. Thwarted at 77 so far, its hesitancy mirrors the slower decay it went through since mid-February. The Index's Relative Strength Index (RSI), found at the top of its chart, shows it at only a little above oversold. Typically, during bear market reactions, the RSI line gets up to the 50 neutral level. There may still be some rally in store for the Index, despite it being frustrated as of now.

Like yesterday's, today's regular trading for gold shows morning spills followed by overall steadiness. The downward tests keep on coming, but gold keeps regaining its footing. Given the skeptical clime that surrounds it now, the metal's performance hasn't been all that bad. Its muddling should continue in the overnight session, perhaps with another test of $1,425, but it would be noteworthy if the $1,425 level ends up failing.

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