Gold Ends Bad Day With Twenty-Dollar Loss

Today's rout started long before the pit session opened, with a Venezuelan-backed compromise peace plan for Libya. Announced around 1 AM ET, it took off close to fifteen dollars off gold's price from top of its stumble to bottom. Although gold mostly recovered by the time regular trading got rolling, the damage was done. Gold traders were now in a mood to look for reasons to sell.

Reasons, they got. Although the European Central Bank's Governing Council unanimously held its interest rate at 1%, which gave gold a respite, ECB President Jean-Claude Trichet used the phrase "strong vigilance" when he descibed the ECB's eye on inflation. This, the market took as a disguised threat to raise the ECB rate. Currency traders pushed up the euro to the greenback's detriment. Accordingly, a Wall Street Journal article cited Trichet along with the Libyan peace plan as the reason why gold got routed again in the regular session. The immediate downer came from the other side of the pond.

At 8:30 AM, the latest initial jobless-claims report was released. It showed intial jobless claims dropping to almost a three-year low. The drop to 368,000, when the market was expecting a rise to 398,000, brought back the recovery trade thesis to gold's detriment. So did an unrevised fourth-quarter productivity number, which the market was expecting to be revised downwards. Although the latter report indicated weakness, because both output and hours work were revised downwards and cancelling each other out, the overall number played into the recovery story. Initially poking up after the figures were released, gold turned tail from $1,431 and shot down to $1,420. Trichet's speech explaining the ECB's decision ran contemporaneously with those releases, and added to the decline.

After that upset, the metal remained in a range between $1,420 and $1,426. The $1,420 support level didn't break until just after noon, when enough selling entered the market to push the metal down to $1,412. Shaking off the second plummet of the regular trading day, gold climbed up to $1,416 until another selling wave drove it down to the day's low of $1,409.40. This stumble was recovered from almost completely as trading came to an end, but the metal's spot price ended with a loss of $20.40 on the day.

Gold's six-month chart, from Stockcharts.com, shows its plummet erasing its previous overbought condition:



As shown by the chart, the metal sliced through its previous $1,420 support level. It plopped back into its previous short-term $1,400-$1,420 range. Today's plummet shows what's been levitating gold: the Mideast-North African turmoil. A sign of ease in the region did a fair bit of damage to the metal, and opened ears to other bad news. The Trichet-influenced drop gives a foretaste of what will happen once the Fed and ECB raise rates. Still, there are some who think that today's plummet opens up a bargain opportunity. Gold may have some drop left in it, though. If better U.S. economic news keeps coming, the recovery trade will revive.

As for the U.S. Dollar Index, Trichet's words had a more direct effect. From 76.85, the Index plummeted to 78.45 on his hawkishness. Although later recovering to around 76.6, it slowly fell again in the afternoon and wound up where it was at the 8:30-:35 plummet. As of 5:30, the Index was at 76.455.

Its own six-month chart, also from Stockcharts.com, shows the continuation of its recent decline brining it closer to a new fourteen-month low:



That low is about 75.7. As the Index now stands, it's less than eight tenths of a point away from matching that bottom. The chart continues to look bearish, and its decline is becoming more steady: steady as she goes, downwards. The only question mark comes with the Index's RSI level, which is very close to the oversold level of 30.

What's next for gold will be influenced by how Asian traders interpret today's decline. If the bargain-hunting meme is going to take hold, it'll take hold in Asia first. The overnight trading session will show if there's enough bargain hunting to push the metal back up to $1,420.