Wednesday, March 16, 2011

Gold Recovers From Afternoon Slump, Closes With Gain On Modest Bargain Hunting

Normally, after a plummet of yesterday's strength, gold would continue to tumble the next day. That slumping happened to an extent today, but earlier gains in the overnight session provided a cushion for this afternoon's slide to keep gold in the gains column for all but a limited time in early afternoon. There was some normally good news for gold today. Moody's downgraded Portugese sovereign debt by two notches. February housing starts caved in after January's strong gains. Although the core PPI came in at 0.2%, in line with expectations, the raw numbeer was 1.6% for the month - about double the expected figure. In Japan, there was no new nuclear plant disaster as more workers were brought in to cool the reactor down. The King of Bahrain declared martial law and cracked down on protestors. Crude oil, after slumping as low as $96.25 last night, rallied above $98 on the Bahrain news as well as on relief rallying. Although it got over $99 before pulling back, it largely remained above $98 during that pullback.

Gold didn't react much to those above items, which would have energized it in a better clime. The bulk of its rallying done before regular trading started, it began the pit session at around $1,404. The housing starts and PPI numbers above, released at 8:30 AM ET, were met with a yawn. Unlike in the overnight session, gold floundered in a fairly wide zone as optimists engaged in tug-of-war with pessimists. There were times when it got higher than $1,406 and times when it got below $1,398.

After an 11:30 rally that got gold above $1,405, the pessimists got the edge. Although scrabblingly, gold started declining from that time until 2:15 PM when it reached its day's low of $1,391.50. At that point, gold was clocking a farly substantial loss as the post-plummet slump effect kicked in. Adding to the slump was a mildly strengthening greenback, which peaked at the time gold troughed.

After 2:15, in part because of some bargain hunting and in part because of the greenback stalling, the metal climbed fairly strongly. Pessimists thus muted, the metal settled into a range bordered by $1,396 and $1,398. Near the end of the session, it climbed again with an accelerated stride that was broken by regular trading halting. It turns out that the metal was anticipating a surprise tumble in the U.S. dollar that undermined at 5:00 but afflicted the currency head-on after 5:10. At the close, the spot price was $1,401.50 for a gain of $5.80 on the day. The Kitco Gold Index split the gain into +$5.00 for predominant buying and +$0.80 for a weakening greenback.

Gold's six-month chart, from, shows its modest recovery today:

Although not an outright springback, the fact that gold recovered at all bodes well for the metal. As the chart indicates, normal behavior after a plummet is an afterslide for the next two days. There were two exceptions, both with gains much larger than today's. In both cases, the most recent one being the Jan. 27th reversal, the metal either fell out of bed once more or prepared itself for a solid advance. Both cases saw an overall pause for about a week, the first near the plummet bottom and the second near the springback top. Gold's gain today was much more modest than either of those days, but its gain suggests any post-plummet afterslide won't be that hard on the metal.

As indicated above, the U.S. Dollar Index had a good morning unlike some recent ones. After slumping down to 76.4 shortly after regular trading began, the Index intermittently climbed before peaking at 76.8 around 2:15. Then pulling back, it marked time in a range between 76.6 and 76.7 before a surprise jump in the Japanese yen sent it tumbling down as low as 76.07. As of 5:30, it was stabilizing at 76.25.

Its own six-month chart, also from, doesn't show its surprise tumble:

It does capture the currency's earlier recovery. As its later action makes clear, today's recovery was basically a blip. The Index may not be catalyzed into a continuance of its downturn as a result of that tumble, but it is vulnerable.

Although the items from the Eurozone and U.S. economy would normally induce a better day for gold than they did, they added to a cushion that kept the metal from tumbling further. The pullback may not be over for gold, but yesterday's plummet has not induced all that much pessimism. Although worrying from a contrarian standpoint, a sanguine gold market will likely limit any further tumbles especially if the winds of inflation keeps pushing at gold's back. Tonight's action might be dull again, which would be a blessing in disguise.

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