Thursday, April 28, 2011

Gold Makes Another New Record On Weakened Greenback

Gold didn't react that much to the tumbling greenback in the overnight session. But, it did react when the currency fell anew in tandem with a jump by WTI crude oil to almost $114 in late morning. Both provided enough strength to gold for it to make a new record of $1,539.50 at 11:30 AM ET. Although the metal couldn't hold on after making that record, it did climb back high enough to make for a gain that was close to double digits.

Helping to energize gold and push down the greenback, although not immediately, was the first-quarter GDP number for the U.S. economy. It came in at an anemic 1.8% annualized. Although slightly beating recently lowered expectations, it gave teeth to some recent economic reports that indicated stagflation brewing in the States. One of the reasons why real GDP growth was so low was inflation picking up. Nominal consumer spending was fairly robust, but real consumer spending was a drag-down. Stagflation, of course, puts the Fed in a bind because inflation and unemployment are both high - making the traditional tradeoff painful either way. Ben Bernanke has already indicates which side of the trade-off he prefers right now.

After slumping to the high 1520s when the pit session got rolling, the metal jumped to $1,532 on the GDP and initial jobless-claims news. The latter was also unexpectedly disappointing, showing a jump to 429,000 claims that counfonded expectations for a drop. Not getting much traction afterwards, gold slid back to $1,530 before it got solid footing thanks to a stumble by the U.S. Dollar Index. Then hoofing it up to $1,536, it got a further boost when oil marched up; that final push let it achieve its record at 11:30.

Then, a selling wave was triggered by a recovery in the greenback and slump in oil. From its lofty record height, the metal tumbled to $1,528 before getting a respite. Fluctuating between $1,527 and $1,530, it got a bit of traction but lost footing again around 1 PM. That spill got it touching $1,526 at the bottom.

Then, at 1:45, the metal regained its footing more durably. Hiking up in mid-afternoon, its pace slowed as it got from low 1530s to high. By 3:30, it rambled sideways around $1,536 and stayed horizontal for the rest of the session. As of the close, the spot price was $1,535.80 for a gain of $8.50 on the day. The Kitco Gold Index split the gain into +$3.80 for predominant buying and +$4.70 for a weakening of the greenback.

Gold's six-month chart, from, shows it again shaking off what was in retrospect a minor decline from two days ago:

As its Relative Strength Index (RSI) at the top of its chart indicates, gold is now quite overbought. The last time its RSI was this high, was at the climax of its fall bull run in mid-October. A fairer comparison is to late September, after a run from late July's low that's comparable in length and strength to the present one that started at the end of January. A more seasonally-matched comparison is to last year's run from late March to early May: sad to say, that earlier run turned into a sharp pullback a short time after gold became overbought. This string of overboughtedness, despite the seasonality mismatch, is more comparable to the fall run. That one had a few weeks left before turning down. From a seasonal perspective, though, next month tends to mark a top. The old adage "Sell in May and go away" kicks in at the start of next week. This present run, although impressive, is getting advanced in age and might well be living on borrowed time.

The U.S. Dollar Index made a new 31-month low, of 72.86, in overnight trading. Unlike the last time it visited those depths, its recovery today wasn't much of one. After recovering to 72.275 right after regular trading started, it double-topped forty minutes later after being knocked out of climb mode by the GDP news. That double-top preceded a more serious decline which brought it all the way down to 72.955 by 10:10. Then recovering, it couldn't make its way to 73.3 despite two tries. After the second try, at 1:30 PM, it gave up and slid down to 73.1; it spent the rest of the session nearby. As of 5:15, it was still rambling at 73.11.

Its own six-month chart, also from, shows its tumbling continuing for the fourth day in a row:

The Index's own RSI, found at the top of its own chart, is even more oversold than it was yesterday. At this level, the Index has about two points to go before it reaches depths unknown to it for the last twenty years - at least. That said, 73.0 is proving to be a durable if spongy support level. I'd watch for a secondary recovery, even if the currency's trend is most definitely downwards.

Again, gold set a new record. Given the risk of traders selling on the Fed news, it's notched up an impressive day. Unfortunately, the month that's about to begin tends to correlate with an intermediate-term high. The seasonality isn't exact, but it's tended to work as long as the part about staying away 'til Labour Day is ignored. Last year, gold's summer seasonal low was in late July: earlier than expected. Still, the metal's overboughtedness and upcoming seasonal weakness (if it behaves normally) makes for moving to the sidelines if you're in it for the longer term.

There's a small possibility of gold shrugging off that seasonality, but I don't even want to go down that road. I'll confine myself to saying: if gold goes up in late spring, then it'll be moving in accordance with a crystallizing mania.

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