Gold Falls With Oil, Slices Through $1,425

The consensus of nerves that recently built up over gold proved to be right. Crude oil started to tumble at 1 AM ET, and gold followed in its wake. With no new disruptive developments in the Libyan civil war, the fear premium in the oil market has had a slice taken away from it. The French government has become the first to recognize the Libyan rebels as the legitimate government of that country.

Before oil's tumble, the metal had descended to the high 1420s but hovered there. Just before midnight, it crept up to $1,430 again. Starting at 3:00, when the oil price slide got rolling and the greenback had shot up, gold began a downward tumble that proceeded in three stages. From bumping against $1,425 as a floor, the metal bumped against that price as a ceiling. Its slide didn't stop until 7:00, when it reached a low of $1,415.10. The subsequent relief rally only got it to its old ceiling of $1,420. As of 8:12, the spot price was $1,417.90 for a drop of $11.00 on the day. The Kitco Gold Index split the loss into -$3.70 for predominant selling and -$7.30 for a strengthening greenback.

As indicated above, the U.S. Dollar Index went on a tear shortly after oil began tumbling. After slumping a little during evening trading, the Index stopped around 76.65 and reversed itself at 11 PM. The first stage of its morning rally actually beat oil's slide, and may have contributed to the downturn by making crude's unit currency more highly valued. Just before midnight, the Index was bumping against 76.9. Marking time until 1:40, it shot up shortly afterwards to above 77. A later pullback preceded a climb to new heights; as of 8:20, it was still climbing at 77.16.

A Reuters report said gold declined due to the drop in oil prices, but the tumble was cushioned by worries over Eurozone debt after Spanish sovereign debt was downgraded by Moody's.

Falling crude prices and gains in the dollar are prompting some investors to cash in gains after last week's rally to a record $1,444.40. Oil fell by more than $1 as the dollar index rallied amid fresh worries about the euro zone's recovery.

"It particularly seems to happen that when gold hits new highs, there is a chunk of profit taking, and it does lose momentum, but that doesn't mean we are not going to regain new highs," said Societe Generale analyst David Wilson.

"Just the fact that we are going to increasingly see more signs of inflationary pressures globally should be supportive for gold," he said.

The article also notes Asian buying is tepid because of high prices; many of them are still waiting for a drop to $1,400 or below. For the third day in a row, holdings of the SPDR Gold Shares Trust were unchanged yesterday at 1,217.30 tonnes.

A Bloomberg report said gold dropped because of the higher greenback and profit-taking.

“The profit-taking is related to a stronger dollar,” said Bernard Sin, the head of currency and metal trading at MKS Finance SA, a bullion refiner in Geneva. Still, “the situation in the Middle East will have a lot of influence” on demand for the metal as a protection of wealth, he said....

“There are short-term traders and investors who want to reap profits after the rally,” said Chae Un Soo, a Seoul-based trader with KEB Futures Co. “Losses will be limited as there’s an enormous interest in gold and precious metals.”

The article also mentions an EU leaders' meeting tomorrow to discuss the continuing Eurocrisis.

A Wall Street Journal article said that gold's fall will likely be limited by bargain-hunting due to the Libyan turmoil and the latest iteration of the Eurocrisis.

UBS analyst Edel Tully said that while there is no desire to sell gold right now, "the overriding sentiment among clients is the lack of urgency to buy it."

But traders and analysts say some of the reluctance stems from the metal's near-record high prices and expectations that a further pullback in the short term may provide a good entry opportunity.

A London trader is also quoted, saying that it's only a matter of time before gold reaches $1,500.

The much-watched initial jobless claims number, released at 8:30, showed a jump of 26,000 to 397,000. The number was worse than anticipated, expectations being for a more modest rise to 378,000. The U.S. trade deficit widened quite a bit in January, up 15.1% to $46.30 billion. Its cause was imports rising faster than exports; the latter are at record highs. The gap was way above expectations for $41.5 billion. Although the bulge in imports can be taken as a sign of economic recovery, the impact of both items on gold was to energize a rally. Starting just above $1,417 when regular trading began, the metal crawled up then shifted into a run as $1,420 was sliced through. As of 8:42, the spot price was $1,421.30 for a drop of $7.60 on the day. The Kitco Gold Index attributed +$1.25 to predominant buying and -$8.85 to a strengthening greenback. The U.S. Dollar Index, after slipping a little on the data, continued its rally; as of 8:45, its climb got it to 77.21.

This morning's tumble provided gold with the sternest test of its old ceiling. There's a real chance that the metal will stay down, putting it back in its old consolidation zone, but the pessimism preceding the decline speaks to a short-term pullback. Regular trading may lose the morning choppiness that's afflicted the metal the last few days running, but it looks like gold will be booking a loss for today.