Monday, April 18, 2011

Gold Makes New Record On S&P Negative Outlook For U.S. Treasury Debt

The markets got a real surprise at 9 AM ET, when Standard and Poor's announced that it had changed the U.S. government's debt to a negative outlook. Although that debt is still rated AAA, the trend of deficits and no seeming plan to eliminate them made the U.S. government's finances compare badly to those of other governments whose debts are also rated AAA. Unlike Moody's 1996 frown, this one didn't mention the impending approach of the debt ceiling.

The stock markets were hammered down, while gold took off. Interestingly, WTI crude oil tumbled on the news by almost two dollars before recovering about half of the drop in the afternoon. Even more interestingly, the greenback was knocked down like the stock market but managed to not only recover but surpass its daily highs. The Euro has come into some disrepute because of rumours that the Grecian government will have to restructure its debt. However paradoxically, the greenback benefitted from safe-haven buying after the knockdown was shrugged off.

Gold had recovered to $1,482 after being pushed down to $1,477 just after 8:00. Unlike the last few days, the beginning of the pit session - which went well - was an accurate predictor of the rest of the day's action. In the ten minutes after the S&P negative-outlook hit the Internet, gold had shot up to almost $1,496. Backtracking to $1,488, the metal renewed its strength as the equity market's open revealed the extent of the damage done by the review. Again, it took only ten minutes for gold to leap up to its new record high of $1,498.80. With only one dollar and twenty cents to go before $1,500, selling entered the picture and gold was pushed back. That peak saw the shift of momentum to the sellers: after recovering from $1,490 to $1,495, on the strength of a one-point drop in the NAHB/Wells Fargo Housing Market Index, gold fell to as low as $1,484 before the selling wave vanished.

The metal recovered from the selling onslaught at 10:30. It climbed up to the low 1490s, but its momentum from the outlook news had largely gone. Helped by a mild retreat of the U.S. Dollar from levels it hadn't seen in a week and a half, gold's volatility shrank as it edged to above $1,495. By the time regular trading was near over, it was loping along right around $1,496: only a slide at 4:45, not completely recovered from, kept it from ending the day above that level. As of the close, the spot price was $1,495.90 for a gain of $9.50 on the day. The Kitco Gold Index attributed +$22.90 to predominant buying and -$13.40 to a strengthening greenback.

Gold's six-month chart, from, shows its run continuing for a third day in a row:

Today's run-up can be seen as the result of a lucky break. Before that S&P announcement, gold was running a small loss. (The outlook change certainly surprised me.) The selling that pushed down the metal when it neared $1,500 is indicative of the profit-taking that will be called forth should it reach the $1,500 mark. Gold's Relative Strength Index, found at the top of its chart, is now above the 70 overbought level. The last time it surmounted that level, on April 8th, it slid down for the next two days. Thankfully, gold was well below today's closing on that day. The metal making overall gains between then and today is confirmation of its breakout and subsequent uptrend. Last Friday, I said that gold will likely test $1,500 this week. To be honest, I didn't expect a near-test so soon. Even if gold slumps a little this evening, it's still much less than ten dollars away from $1,500. Despite this morning's test fading a little more than a dollar away from that round number, the metal's still in a position to reach that number tonight or tomorrow. Whether it does, depends on the level of profit-taking after today's wild ride.

Turning to the U.S. Dollar Index, it managed to shake off its slumps in a surprising climb that was energized by impugnment of the Eurozone. Reaching almost 75.45 after climbing from below 75.0 in the overnight session, the Index was thrown off its track by the outlook news. Then, a funny thing happened on the way to 75.05. After spending about fifteen minutes dusting itself off, the Index started to climb back. Its run accelerating as more ground was gained, it pushed all the way up to 75.82 before it ran out of steam at 11:05. Then exhausted, it slid back to a range between 75.45 and 75.55 in which it spent the afternoon. As of 5:30, it was ambling along at 75.505.

Its own six-month chart, also from, shows its remarkable recovery today:

As has been the case with the Index, its countertrend upward rally was swift and covered a lot of ground. Despite that gain, today's leap was no breakout. It resembles earlier short-term 'srecoveries from near-oversold levels, and it might not last long. The Index's own Relative Strength Index (RSI), also found on the top of its chart, came close to the 50 neutral level today. During this downturn, it tended to lose strength when its RSI reached 50. As of now, there's little reason to believe today's run-up wasn't any different.

Gold came close to hitting $1,500 today. Thanks to its still-present strength, it's still close. Profit-taking is likely to enter the market overnight, as the shock effect of the outlook downgrade fades, but the metal is still close enough to make $1,500 do-able. If the winds are rigth, we'll see a new record at or above $1,500 within twenty-four hours. The greenback fading from its own leap might provide that wind.


  1. Hey Daniel,

    Every thing is in place for the Gold bubble to finally pop(j/k?)... The warning S&P gave congress over the debt ceiling is loud and clear. I see congress agreeing to a plan that promises to cut more than has ever been cut before... while raising the debt ceiling to the worlds delight. A few more reports of positive earnings can quickly erase todays panic selling;
    making the way for the bulls to take control.

    As I type this out, I am updating my watchlist to take advantage of such a scenarios if it does manifest. If not, I will quickly put my bear hat on : )

  2. Myself, I'd be cautious about shorting gold. As for now, anyway, the tend is up.

  3. I'm actually long symbol GOLD, I sold a vertical put May20, 82.5/77.5

    As far as getting short Gold, I pay close attention to key areas of support and resistance. 1500 Gold is definitely an area many will be watching closely. 1500 may prove to be a speed bump on its way to higher highs, or it can prove to be a great opportunity to take advantage of a pull back or more?

  4. Gold touched $1,500 today, but pulled back a little. So far, $1,500 looks like a speed bump.

    I believe that the overall trend is up, though, and there should be a good (but not uninterrupted) ride until sometime in May. A real pullback would be temporary.

    Best for your sold vertical put. It should expire worthless.