Thursday, May 19, 2011

Gold, After Sinking, Recovers Enough For Mild Decline; Helped By Sinking Greenback

After yesterday's decent gain, gold seemed primed to take out $1,500. Unfortunately, that happy outcome was not to be. Instead, after bumping against $1,500, gold ended up declining to the low 1490s and spending some time in the high 1480s. The sell-off was prompted by a temporary recovery in the greenback, but it was added to by the enthusiasm of yesterday going missing. Even though the U.S. dollar sunk below where it was yesterday, gold did not recover to yesterday's levels. Instead, it closed with a small loss while barely testing $1,495.

An earlier recovery in the greenback got the metal down to $1,490 before regular trading started. Climbing back to $1,493 before the pit session started, it got sold off and slipped down to $1,488 in the first hour of regular trading. Pushed up by the greenback sinking, it reintroduced itself to the low 1490s but only temporarily. By 11 AM ET, it has sunk to a new regular-trading low of $1,487.

Double-bottoming at that level shortly afterwards, it first jumped up but skidded back to $1,488 at noon. Then, propelled by the U.S. dollar's slide, it ascended to $1,496 but was sold off. Not being able to muster the strength to challenge $1,500, gold spent the rest of the afternoon in the low 1490s. After a later-afternoon run up to just below $1,496, it again lost energy and slipped down to its closing level. As of the end of regular trading, the spot price was $1,493.80 for a drop of $3.10 on the day. The Kitco Gold Index attributed -$8.90 to predominant buying and +$5.80 to a weakening greenback.

Gold's six-month chart, from, shows the metal coming to a near halt as if it were satisfied with where it was:

Another take on gold's pause is it doesn't know what it's going to do next. The action of the last few days is consistent with the economist's interpretation of the symmetrical-triangle chart formation: having been battered high and low, the asset veers in on a temporary equilibrium value and settles in around it. Chartists, who aver that a symmetrical triangle means a continuation of the move that preceded the formation, redraw the sides of the triangle when this equilibrization occurs. Gold's action in the last few days is consistent with the economists' take on the triangle. The gold market has evidently decided that the low 1490s is fair value for the metal, given what's known now. This settle-down doesn't mean that the chartists are wrong, though, as equilibriums don't last long in the gold market (if they show up at all.) Although there is a risk of a renewed downtrend, gold has managed to fend one off so far. Its Relative Strength Index, found at the top of its chart, continues to hover around the 50 neutral level. Not often do we see a quiet market, like what we're seeing now.

As indicated above, the U.S. Dollar Index lost its recovery momentum and slid from the 75.4 level it was at as of the start of regular trading. That slide happened at noon, and not before the Index rallied to 75.535. Sliding down at 9:10, it gained back half of the height it lost after bottoming at 75.25. Stymied at the level it was at when regular trading began, it slid again and tumbled to 75.1. From 12:45 to the end of regular trading, it drifted inconsequentially downwards; as of 5:15, it was still drifting at 75.09.

Its own six-month chart, also from, shows its short-term decline continuing:

Compared with its recent string of gains, those down days don't seem like much - but they add up. The Index is now only slightly above the level it reached after the first two days of its snap-back. it's still above 75, but it's edging towards a test of that level. That said, it still has a long way to go before reintroducing itself to the levels it was at when this month started. More likely is an upward reversal, as its performance right now is consistent with the Euro licking its wounds after being pummeled hard earlier this month. Assets that undergo that pummeling, like silver and gold have recently, have a hard time re-reaching their highs in the near term and often don't.

Despite gold disappointing today, given the greenback's fall, the metal is showing little inclination to resume tumbling. Support at $1,490 is spongy, and $1,485 does make for a more accurate near-term support level, but enough buying comes in when gold's below $1,490 to get it above again. Its near-term movement is neutral. Granted that it shows little inclination to resume rising, but few assets do after being swacked like gold was a couple of weeks ago. The metal looks like it's consolidating, which is not a bad outcome for an asset that's been poleaxed.

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