Gold Sinks On Light At End Of Libyan Tunnel

Gold tumbled more than ten dollars just after 1 AM ET. Media accounts say that the breakdown was prompted by a peace plan for Libya from Venezuela, which the Arab League liked, but market action last night suggests the rally had gotten tired anyway. The metal sunk a few dollars an ounce last evening. Recovering to a high of $1,437.50, its tumble got it to an early morning low of $1,421.80 before a rebound kicked in. Failing to rally above the low 1430s, the metal then turned around and reintroduced itself to the $1,425 level. The greenback had no influence on gold's gyrations. As of 8:10, the metal's spot price was $1,426.40 for a drop of $9.30 on the day. The Kitco Gold Index split the loss into -$8.90 due to predominant selling and -$0.40 due to a weakeing greenback.

The U.S. Dollar Index did little last night. A slight rise was replaced by a slight fall, leaving the Index mostly between 76.65 and 76.70 until a small rally kicked in around 3:15. Peaking at a little above 76.8, the Index then retreated to 76.6. Another rally replaced the decline, but it lacked even the mild strength of the previous one. The greenback seemed unaffected by the Libyan peace plan proposal. As of 8:16, the Index was at 76.77.

A Reuters report, written a little after the 1 AM drop, said the Libyan peace proposal was what put the skids to gold.

Arab League Secretary General Amr Moussa said on Thursday that the a plan to bring peace to proposed by Venezuelan leader Hugo Chavez was "under consideration."

News network Al Jazeera said earlier the plan involved a commission from Latin America, Europe and the Middle East trying to reach a negotiated outcome between Libyan leader Muammar Gaddafi and rebel forces for this North African oil-producing
country.

"If some sort of resolution is achieved for Libya, it will certainly affect gold -- investors will take profit and adjust their long positions," said Ong Yi Ling, an analyst at Phillip Futures.

Also impacting gold is European Central Bank tough talk on inflation, which did not lead to a rate hike this time. A future hike by the ECB or the Federal Reserve might throw gold down a fair bit, but the metal has adjusted to rate hikes and reserve-ratio increases by the People's Bank of China. Holdings of the SPDR Gold Shares Trust were unchanged again yesterday; they're still at 1,210.96 tonnes.

The morning Wall Street Journal report said that gold was thrown back by the Libyan peace plan, but some traders think it'll dust itself off and make fresh record highs.

"We saw a knee-jerk reaction to the Libya peace deal rumors this morning, but people have since started buying the dips," said Standard Bank analyst Walter de Wet....

"In the U.S. there is only a very small probability that the Federal Reserve will raise interest rates any time soon and this is very positive for gold," he said. Additionally, though the European Central Bank is likely to be relatively hawkish on inflation in comments following its rate-setting meeting Thursday, an actual rate increase is unlikely at this time, Mr. de Wet said.

"If the ECB shows a tough stance over inflation—but doesn't actually raise rates—this should favor the euro and benefit gold," he said.

The article also quotes James Moore as noting there are still trouble spots that could boost gold. He also called attention to continued strong physical demand.

As expected, the European Central Bank held rates at the record low of 1%. There has been hawkish talk from ECB president Jean-Claude Trichet, which benefitted the Euro, but there's been no action so far. The rate decision was unanimous. With regard to the U.S. economy, at least one item was better than expected. Fourth-quarter productivity was unrevised at 2.6%, confounding expectations for a drop to 2.2%. A drop in the revision of real output was counterbalanced by a drop in the number of hours worked. The unambiguously better item was initial jobless claims for last week, which dropped to a three-year low of 368,000. Expectations were for a rise to 398,000. Continual claims declined as well.

Although gold was rallying just before the release, on the ECB decision to leave its rate alone, the jobless-claims news sent it downwards in a hurry. From $1,431, the metal plummeted to $1,422 before bouncing. Once bounced, it continued to fall to $1,416.60 before taking another breather. As of 8:49, the spot price was $1,421.40 for a drop of $14.30 on the day. The Kitco Gold Index attributed -$19.30 to predominant selling and +$5.00 to greenback weakening. The U.S. Dollar Index was hit fairly hard after initially rallying at 8:30. From a high of 76.84, it shot down to 76.36 at about the same time gold plummeted. Perhaps the tough talk from Trichet did it, as the economic news was the kind the greenback would be expected to take as bullish. As of 8:54, the Index had bounced up to reach 76.45.

As I indicated above, gold did show signs of tiredness before being knocked down. In the broader view, its tumbles aren't that bad. $1,420 has held, and the metal's been rallying for a long time without any significant pullback. Today's falls may have broken the rise for now, but gold's a lot better off than it was a month ago. The drops may continue during the rest of the day, but the metal has a good chance of closing above $1,420.