Tuesday, March 8, 2011

Gold Falls Below $1,430 On Profit-Taking, Inurement

The civil war in Libya continues, with increasing talk in the direction of NATO (or perhaps the UN) imposing a no-fly zone over the country. The Arab League has said it was okay with such a maneuver. Gadaffi, not surprisingly, didn't like the idea. Libya's sovereign wealth fund has been put on a sanctions list in the EU. The U.K. government is talking about stripping Gadaffi's Libya of its oil revenue, and placing the funds in an escrow account administerd by the U.N. U.S. major oil companies and Wall Street banks have stopped trading Libyan crude. The rebels have set up an interim governing council, which claims to be the legitimate government of Libya despite divisions in the rebel ranks.

To sum up, there was lots of Libya-related action but the tilt is towards getting rid of Gadaffi and his regime. Given this tilt, the end of the Libyan civil war is closer in sight. The gold market, becoming inured to the civil war, sold off today and closed with a minor loss. Those traders who expressed unease about the gold market early this morning were right on the money. Oil notched down too.

Before regular trading opened, the metal had recovered from an overnight spill and was up in the low 1430s. Breaking out of a range between $1,432 and $1,434, the metal jumped up at 9 AM ET and reached its day's high of $1,437.80 - to no avail. Both oil's decline and the greenback's rise contributed to techncial selling, which sent the metal down in a two-stage drop that ended with it touching its daily low of $1,422.50 at 10:00. Although that fall gave way to a relief rally, it had trouble getting up above $1,430. The resultant crest set up a range between $1,424 and $1,430, which narrowed as the afternoon went on.

By the time the pit session ended at 1:30 PM, gold had trouble getting above $1,328 but its next pullback was milder. So was the third one, early on in the electronic-trading hitch. Perhaps encouraged by that firmer footing, gold slowly rose in mid-afternoon to a tighter range between $1,428 and $1,430; it closed in the middle. At the end, the spot price was $1,428.90 for a drop of $2.20 on the day. The Kitco Gold Index attributed +$3.95 to predominant buying and -$6.15 to a weakening greenback.

The metal's six-month chart, from Stockcharts.com, shows it still stuck a little below its record high:

In other words, it's consolidating again. Had the Libyan crisis not shown up, it's a fair bet that gold would be still stuck below its December high. Because that crisis intervened, gold holders got the benefit of a new record high - but it's still the season for consolidating. The metal's Relative Strength Index, found at the top of its chart, is still near the overbought level. There is some scope for it to pull back, although right now there's no real sign of it doing so. The old $1,425 barrier is still providing support to gold's new heights.

Springing back from its string of declined, the U.S. Dollar Index continued yesterday's uptick and spent most of the entire morning rallying. It's enjoying one of those countertrend reactions, upwards, again. The rally continued 'til about 10:00, when it peaked at a little below 77.0. Then pulling back, its rallying power exhausted, it settled into an afternoon range between 76.75 and 76.8. Tests of both ceiling and floor wound up reinforcing the range. As of 5:30, the Index was at 76.785.

Its own six-month chart, also from Stockcharts.com, shows its snapback from its downtrending:

Given the Index's last recovery early last month, this one could last for a week or two. It's no longer making a blip up: it's now benefitting from the obscured light at the end of the Libyan tunnel. The Index did have a negative influence on gold yesterday, but rose along with gold early in the morning. The metal's pullback after 9:00 reset the negative correlation.

Gold has held up above $1,425, but its hesitancy during its stall is going to lead to more unease unless some other event gets it rolling again. Those looking for a serious pullback may get one next month during the European Central Bank's rate decision. If the ECB hikes the rate, even if such a hike be too little and too late, gold is likely to endure an extended tumble. As for the more immediate future, the metal may continue in its muddle - but it looks like more tests of the $1,425 level are on the way.

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