Gold Slumps, Then Recovers As U.S. Dollar Sinks

As might be expected, gold slid last night on a bout of profit-taking. Starting off at above $1,495, it slid down to $1,490 last night. Its final drop took place at 1 AM ET, when it bottomed at $1,486.90. A dip in the price of WTI crude oil to below $106 added to the downwards pressure. That skid, though, marked a reversal accentuated by the greenback sliding later. Back above $1,490 before 2:00, the metal climbed up to just below $1,495 and lingered at that level. A jump to above $1,496 at 5:00 only lasted an hour. The metal's next rise, starting at 7:00, was more durable and provided a new record. Gold's new all-time high is now $1,499.40. Although the metal was pushed down by more profit-taking, it's still close enough to reach $1,500. As of 8:11, the spot price was $1,495.30 for a drop of $0.60 on the day. The Kitco Gold Index attributed -$6.90 to predominant selling and +$6.30 to a weakening greenback.

The U.S. Dollar Index, after staying steady between 75.45 and 75.53 last night, slumped for most of early morning. Two attempts at a climb, one at 11 PM and the other at 2:20 AM, topped out around 75.6. Thus double-topping, the Index fell to 75.15 in the next five hours before stabilizing. As of 8:17, it was recovering at 75.22.

A Bloomberg article said gold was little changed when all was said and done. It managed to keep its gains from yesterday morning despite it being overbought.

The “uptrend is well intact and we expect any pullback to be very limited,” VTB Capital analyst Andrey Kryuchenkov said in a report today. “The downside is limited, with the focus on the euro zone peripheral debt as well as U.S. monetary policy expectations.”...

Gold prices may keep rising for “some years into the future,” Blackrock Inc. (BLK) fund manager Evy Hambro said in an interview with Mark Barton on Bloomberg TV’s “On the Move.” Bullion’s fundamentals are supportive of current price levels, Hambro said.

Another analyst is quoted as saying the inflation trade is the main driver now. According to the World Gold Council, gold demand rose again in 2010; demand for gold bars jumped by 66% to a record-high 880.5 tonnes. A tally of 10 gold ETFs tracked by Bloomberg showed their holdings rising slightly.

A Reuters report said gold met strong resistance just below $1,500 but still held onto its gains.

"Most of the trends out there -- whether that's worries about the euro, worries about coming inflation, worries about U.S. debt, Chinese buying seeming relatively strong -- suggest the price ought to be going higher," said David Jollie, an analyst at Mitsui Precious Metals.

"It seems there is a reasonable appetite still to buy, but if you look at the pace it has gone up at in the last week, that doesn't seem sustainable," he added.

"It would be a surprise if we don't get to $1,500 an ounce, but it would also be a surprise if we shot through it."

The S&P negative outlook placed on U.S. sovereign debt was taken as positive because it highlights the U.S. government's fiscal mess. Holdings of the SPDR Gold Shares Trust were unchanged yesterday at 1,231.16 tonnes.

A Wall Street Journal report said gold was holding steady near $1,500, but opinions are becoming mixed. Andrey Kryuchenkov is optimistic, but an unnamed trader is skeptical:

"With worries about sovereign debt, inflation and the strength of paper currencies, gold isn't just a house of cards, but it is a bubble, all the same," said a trader. "When you see the public as well as the more astute investor start to get involved in market, it is often a danger sign. When the guy on the street is buying it, we're likely to be nearing highs."

U.S. housing starts for March were released at 8:30, and the number showed a 7.2% rise to 549,000 annualized. Permits rose by 11.2%, although those for single-family homes rose a more modest 5.7%. The rise was well above expectations for 520,000 annualized. Despite the optimism inherent in the report, gold kept rising after its release. Dogged by a slump to $1,493 that climaxed a little after the pit session began, the metal turned around at 8:25 and climbed back above $1,495. Selling pressure then pushed the metal below the level at which it had bottomed. Perhaps the housing-starts report triggered the selling five minutes after its release. As of 8:42, the spot price was $1,491.80 for a drop of $4.10 on the day. The Kitco Gold Index assigned -$10.50 to predominant selling and +$6.40 to greenback weakness. The U.S. Dollar Index, after slumping back to a little above 75.15, reversed itself and began climbing again. As of 8:45, it paused at 75.21.

Althugh gold came even closer to $1,500, that level is still out of reach. Profit-taking, along with increased skepticism about the rally, is holding the metal back. If the beginning of today's pit session is indicative of how it will perform today, then gold's going to be in for a rough ride. If not, it may take another crack at $1,500. The latest record was only sixty cents below that well-watched number.