Thursday, March 10, 2011

Gold Gets Routed On Oil Price Drop, Rising Greenback

If there's any consolation to a day like today, it's confirmation of what pushed gold up in the first place. The oil price went on a slide today, bottoming at just over $100/bbl before recovering to about $102.50 by the end of the day. WTI crude shot up around noon, but that didn't help gold: its decline, which more than a few traders were waiting for, self-reinforced. After oil bottomed, the plummet was amplified by gains in the U.S. Dollar Index. Although the greenback's rise was in part due to more Eurocrisis rumblings, the gold market cared not for that take; today was a bear's day. The release of a disappointing intial jobless claims number, showing a rise well above expectations, provided only a temporary respite to the decline. As a result of the cumulative drops, net of an afternoon recovery, gold closed down twenty dollars on the day.

The entire rout started at 3 AM ET. Rather than being spared in regular trading, as I had hoped, gold kept getting hammered until it bottomed at $1,402.00 just before noon. The plummet proceeded in stages, but from the day's perspective it was a fairly steady downslide. The worst of it took place at 9:30, when oil bottomed. The stock markets opening up a lot lower didn't help the metal at all.

After the final bottom, gold climbed part-way back up in a fairly strong relief rally, suggesting that prior panic drove it down too far. Fuelled by bargain hunting, the metal peaked at $1,417 before pulling back and scrambling in a $1,410-$1,414 range. Having broken through $1,425 definitively, the metal ended up well below that prior support level. As of the close, the spot price was $1,411.10 for a drop of exactly $20.00 on the day. The Kitco Gold Index split the loss into -$10.10 for predominant selling and -$9.90 for a strengthening greenback.

Gold's six-month chart, from, shows its rout extending down to a support level that the metal left behind at the beginning of this month:

As noted above, the fear of a decline amplified the rout. With $1,425 broken, $1,400 is the level to watch. As things stand now, gold is in a new range with a $1,435 top and $1,400 bottom. There's a possibility that today's rout will be shaken off somewhat, with gold staying within that consolidation range. If $1,400 gets broken and stays broken, gold's going to go through a short-term bear phase. Given the relative smoothness of its rise last month, today's plummet can be seen as a return to more normal rockiness. Gold's Relative Strength Index (RSI) number, found at the top of its chart, is not far above the neutral level of 50. Pullbacks during bull runs tend to drive the RSI down to 50 but not much further. Should the RSI sink to 40, gold's action would be consistent with a consolidation phase interrupted by a crisis-fed rally.

Turning to the U.S. Dollar Index, its rally today actually started last night around 11:00. Jumping in stages, punctuated by pullbacks and/or sideways pauses, it managed to climb from just above 76.65 to 77.35. Its peak took place around 3:20, which makes for an unusually extended rally. That peak took the wind away from its back; as of 5:30, it had sunk back to 77.255.

Its own six-month chart, also from, shows it jumping upwards with some force:

As I myself noted last night, the Index's own RSI was too low for 77 to end up as the top. I didn't expect today's strong rally, but I did expect the Index to move higher. As its early February rally shows, the Index has a tendency to reverse from its bear trend rather sharply. That's been the case for the current rally. Today's RSI level, as seen at the top of the Index's chart, is only a little below neutral. Its Moving Average Convergence-Divergence lines, found at the bottom of its chart, made a bullish cross today. It having penetrated the 77 resistance level, it's got some room to run. It could go as high as 78, although not with the same verve it showed today.

It may seem callous of me to describe today's gold rout as instructive, but it did show the metal's dependence upon rising oil. Flareups in the entire Middle-East North-Africa revolution zone, not just Libya, gave gold a hefty push for all of last month. But, a lot of the bullishness did revolve around the oil spike and the inflation its jump will bring. From now, the gold market may nervously watch for any sign of rate hikes or tightening by developed-economy central banks. [The Bank of England kept its rate at 0.5% this morning, but that news was lost in the rout.] If there's any consolation, bargain hunters in Asia are going to be seriously considering ponying up again. Buying support from that region is going to have a major effect on how low any aftershock will go.

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