Tuesday, April 5, 2011

Gold Breaks Through Ceiling To Make New Record

For more than a month, gold has been stuck when reaching the 1440s. There have been a few new records made, but profit-taking managed to swamp the advances.

This time, however, it may be different. The metal, after being driven down a few hours before and regular trading, remained stuck until mid-morning. Then, it spent the rest of the day climbing decisively with the wind at its back. It closed at less than two dollars below its new record high of $1,458.50; that record is more than nine dollars above its previous one. No crisis or screaming headline prompted the rise; instead, it was due to safe-haven buying engendered by the crises and inflation that the gold market already knew about. There's also an increasing perception that the U.S. is entering a period of stagflation.

WTI crude oil fell a bit during the day, to a little below $108. The U.S. Dollar Index fell a little, but only to where it was as of yesterday afternoon. What got gold rolling was the melting away of skepticism after last Friday's tumble was reversed, plus the recognition that inflation is coming to the developed world (apart from the U.K., where it's already flaring up.) That perception was fed by the latest Federal Reserve minutes, which now show a mix of hawkishness and dovishness plus some recognition that inflation's coming back.

Instead of holding gold down, the newfound increase in hawkishness inside the Federal Reserve and outright hawkishness in the European Central Bank (ECB) are apparently helping gold. That's only my take on the matter. But, if gold ends up higher should the ECB raises its rate, the metal will evidently be the beneficiary of an inflation psychology that sees central banks as tightening too little and too late. Needless to say, the gold market shrugged off the latest People's Bank of China 0.25% rate hike today.

As indicated above, that PBoC rate hike added to a funk that kept the metal in the low 1330s until it got rolling at 10:30 AM ET. A half an hour previously, the ISM Service Sector Index for March dropped from February's 59.7% to 57.3%. A drop was expected, but only to 59.0%. Despite the slide the above-50% reading says the sector is still expanding albeit at a slower rate.

Initially, gold ignored the number but its significance seemed to click in as the metal burst through $1,435, $1,440 and $1,445 in the next forty minutes. Although it briefly hesitated while at the low 1440s, it wasn't blocked until it reached the $1,450 level. Rambling along just below $1,550, it didn't make the break until 12:45 when it jumped up to $1,454.

For the rest of the day, gold continued to rise but sedately. The release of the Fed's minutes for the March 15th meeting, which showed newfound divisions between hawks and doves and more focus on inflation, didn't affect the metal much but added to the mild tailwind. Gold took its time getting above $1,455, but it hardly pulled back. At the close, the spot price was $1,456.80 for a sizable gain of $22.30 on the day. The Kitco Gold Index split the gain into +$22.00 for predominant buying and +$0.30 for a weakening greenback.

The metal's six-month chart, from Stockcharts.com, shows a definite breakout:

It's hard to argue with today's candlestick, showing gold decisively moving above its recent ceiling. As is ofttimes the case with breakouts, gold's Moving Average Convergence-Divergence indicator (found at the bottom of its chart) made a bullish cross today. Its Relative Strength Index (RSI), found at the top of its chart, is showing a healthy rise to a higher high on the heels of gold itself doing so. This rally looks like it has legs.

As for the U.S. Dollar Index, it had a dull day today. An attempt in early morning to get above 76.15 didn't pan out, but the subsequent slide was essentially stopped at 75.8. After a brief spill below that level, around 2:00, the Index reversed and settled into a range between 75.85 and 75.9. As of 5:30, it was preparing to step above the range at 75.895.

Its own six-month chart, also from Stockcharts.com, shows its current funk continuing:

There was a slight loss recorded, but the Index is essentially where it was two days ago. It's paused, not showing much inclination to do much of anything. That lassitude will change two days from now, should the European Central Bank (ECB) raise its rate in its next meeting. They doing so would push the Index downwards. As a matter of handicapping, in general, downward is more likely than upward. The only exception I can think of would be the ECB not raising its rate, leading the Index to enjoy a relief rally. That rally would likely be brief.

With another new record booked, both for the pit session's nearest contract and the spot price, gold's in fine form to keep climbing. This overnight session will be one to watch. Should the momentum continue, gold will likely have the fuel to keep pushing ahead like it did last fall. The winter funk is apparently over, and conditions look ripe for a run that would last a month or so. Just a small warning, though: bull runs are puctuated by spills.


  1. The pull back should be interesting to see how much it retraces after the profit taking begins...

  2. It sunk to almost $1,450 last night before it turned up again.