Gold Sinks On Futher Profit-Taking, Prompted By Greenback Recovery, But Recovers

The U.S. Dollar Index managed a slight recovery last night, which amplified a quick round of profit-taking that got triggered when the metal couldn't rise above its closing value of $1,463. Sliding at 8 PM ET, the metal ended up stablilizing in the high 1450s. After a tepid climb, it sunk further after being pressured by the greenback's continued rise. Perhaps the fall was triggered by the Libyan ceasefire agreement announced Sunday night: gold fell less on the news than oil, which could have been the result of the gold market not digesting the implication of the news, far-fetched as a ceasefire may be as of now.

At midnight, gold was stuck at $1,455 but there it stayed. At first climbing back slowly, it managed to pick up the pace when the London market opened. The U.S. Dollar Index taking a dive helped energize the metal, as did a temporary climb by WTI crude oil to above $110. Breaking through $1,460 by 4:00, it peaked two-and-a-half hours later at $1,465.60. News that the U.K. inflation rate unexpectedly fell to 4.0% for March, due to a wave of supermarket sales, hardly deterred the metal. It did reverse and fall below $1,460, but quickly recovered to regain that level and more. As of 8:10, the spot price was $1,460.90 for a small drop of $2.30 on the day. The Kitco Gold Index attributed -$4.80 to predominant selling and +$2.50 to a weakening greenback.

The U.S. Dollar Index managed to overcome resistance at 75.1 yesterday evening, but not by much. Peaking at 75.20 just before midnight, it initially stumbled between that level and 75.1 but later broke down. Its slide, although hesitating at 75.0, broke through but not by very much; it troughed at 74.9. As of 8:15, it was bumping against the floor at 74.91.

A Reuters report said gold eased because the greenback steadied. Goldman Sachs decided to book profits on its recommended commodities trades yesterday, which did not include any gold trades, but its decision still added to profit-taking pressure on the metal. The greenback, though, has become a big driver for the metal:

"When we look at gold, we see its correlation to the S&P 500 is quite strong, and the VIX is off its March highs, so it's not so much a safe-haven play as it is a pure dollar play," said VTB Capital analyst Andrey Kryuchenkov....

"If this was safe-haven buying, you wouldn't see silver so much stronger than gold. This just shows the spec money is going into silver," Kryuchenkov said, adding the crisis in Japan would probably maintain a bid for gold, which boasted strong support
at $1,450.

Holdings of the SPDR Gold Shares Trust were unchanged again yesterday at 1,217.21 tonnes.

An earlier Bloomberg report said the aftereffects of yesterday's tumble in oil, profit-taking and an IMF warning that developing-country inflation was threatening global growth led to last night's slide in gold. WTI crude oil got to below $108 before recovering. Gloomy analyst comments added to the profit-taking.

“The rally of gold prices has a shaky footing as there have still hardly been any inflows into exchange-traded funds and correction potential is building up,” Eugen Weinberg, head of commodity research at Commerzbank AG, wrote in a note. “A broader correction of commodity prices seems to be needed.”...

“Sentiment in gold and silver markets will likely be bearish,” said Ong Yi Ling, Singapore-based analyst with Phillip Futures Pte. “Investors may be eager to lock in profits after the recent rally, fearing the exit of large commodity players from the market.”

The closing of Goldman's recommended commodity-basket trade, justified because the analyst team behind it thought the risks now outweighed the rewards, also added to profit-taking pressure.

A Wall Street Journal report said that gold changed little when all was said and done; trader and analyst sentiment in London remained optimistic. Lower prices may induce bargain-hunting by jewllers who held back from their purchases before the decline.

[G]old should outperform the commodities this quarter, supported by continued geopolitical uncertainty and inflation expectations in both emerging and development markets, Swiss bank UBS said in a quarterly research note.

"As the world economy enters a soft patch and as the fiscal spotlight stretches to include the U.S., this will be a catalyst for higher gold prices," analysts at the bank said. They forecast gold prices will average $1,500 an ounce this year, just short of the $1,550 an ounce previously forecast.

The report quotes the same analyst that the Reuters report quoted, VTB Capital analyst Andrey Kryuchenkov, whose words were more optimistic than the ones quoted by the Reuters article. He said that the uptrend should continue.

Released at 8:30 was the U.S. trade-deficit figure for February, which showed the month's deficit narrowing by 2.6% to $45.8 billion. Although lower, it was more than expected. Both imports and exports fell. Also released was the U.S. import-prices average, which rose 2.7% in March. That jump was well above expectations for a 2.0% gain and much more than February's 1.4% rise. Ex-fuel, prices still rose 0.6%. Prices paid for imports jumped 9.7% in the 12-month period ending in March.

Gold, needless to say, liked the figures: they tie in with the stagflation theme. After bottoming at $1460 just before the pit session started, it climbed swiftly to $1,467.30 before pulling back. Expecting some gold-friendly news, the metal had discounted the above releases and faced some mild selling pressure shortly after their release. A drop in the greenback provided the wind on gold's back. As of 8:46, the spot price was $1,465.80 for a gain of $2.60 on the day. The Kitco Gold Index assigned -$3.00's worth of change to predominant selling and +$5.60 for greeback weakening. The U.S. Dollar Index, surprised, broke throught its floor just before the news and tumbled during and and shortly afterwards. As of 8:49, it stopped skidding at 74.70.

Despite its pullback last night, gold recovered fairly well - suggesting profit-taking was behind last night's slumps. The metal may be volatile this regular session, but the stagflation-compatible news on the U.S. economy has given it a good start.