Gold, After Nudging Up To New Record, Cools Off

The latest Eurocrisis news wasn't that big a surprise to EU watchers: Portugal will become the third of the PIIGS nations to aks for a bailout, joining Greece and Ireland. The only two national governments of the five to successfully resist a bailout are Italy and the much larger Spain. Probably because it already discounted the event, gold didn't move that much on the news. Paradoxically, the Euro rose today against the greeenback - although that conundrum is resolved by the bailout announcement being overpowered. There's a widely-held expectation for a 0.25% rate hike from tomorrow's European Cental Bank Board of Governors meeting. Weakness in the greenback, and a later-reversed advance by oil to above $109, helped gold eke out a small gain today.

The metal stumbled around when regular trading began, in a ragged range roughly bordered by $1,458 and $1,461 as the U.S. Dollar Index inched up. The currency reversing and falling gave gold enough of a boost to enable it to make a new record high of $1,463.70 around 10 AM ET. After being blocked, the metal then succcumbed to profit-taking and slid down to $1,454. Recovering only to $1,358, it slumped to $1,454 again.

After double-bottoming, just after 12:30, gold again recovered but this time more durably. Its afternoon relief rally carried it all the way up to $1,461. Peaking at 4:15, it slid back down but not enough to take away its refound gain. As of the close, the spot price was $1,459.10 for a gain of +$2.30 on the day. The Kitco Gold Index attributed -$4.70 to predominant selling and +$7.00 to a weakening greenback.

Its six-month chart, from Stockcharts.com, shows yesterday's gain being built on but only by a little:



After the extent of yesterday's rise, a bit of profit-taking and a much slower climb isn't that surprising. There may be a pullback coming, even though a European Central Bank (ECB) rate hike is both widely expected and now seen as salubrious. If the fall of the greenback is factored in, there actualy was a mild pullback today. Factoring against a pullback tomorrow is a hike's likely effect on the U.S. dollar. The interesting question is, what would happen if the ECB leaves its rate unchanged? The most likely effect would be a jump in the greenback, which would put pressure on gold. But, the gold market may take a steady course as a sign that the ECB is still in accomodative mode despite recent hawkishness. This question is largely hypothetical - but, given the current spin of salubrity on a hike, gold could sell off if the ECB rate remains at 1.0%.

The U.S. Dollar Index, as mentioned above, sold off after an early-morning climb to 75.75. Sliding at 9:30, it reached almost 75.45 at 11:00. Then recovering a little, it scrabbled up to 75.55 before settling into a range with that level being the ceiling and 75.5 the floor. Moving listelessly in later afternoon, it touched 75.54 at 5:30.

Its own six-month chart, also from Stockcharts.com, shows a fairly substantial decline on the day:



Confounding my expectation for a continued muddle-through, it confirmed my intuition about its next move being downwards. Falling because the Euro keeps rising, the Index is discounting that widely-expected rate hike. 75.5 held as a support level, but it won't if a further rise in the Euro pushes the greenback down further. As of now, the Index is likely to keep falling.

The gold market awaiting tomorrow morning's rate decision is like the wait for last Friday's U.S. nonfarm payrolls report, but with a likely different outcome. The only scenario I can see that would knock down gold would be a hike of 50 basis points instead of the widely-anticipated 25. A combination of profit-taking and selling on the news would also knock the metal down, but that would be a side effect of the optimistic scenario playing out. Given that anticipation, where gold goes in tonight's regular trading is hard to guess. Most likely, it'll stay steady until the decision comes down - and then faces the real surprise.