Monday, May 2, 2011

Gold Closes With Double-Digit Loss After Unusually Volatile Day

Given how overbought gold was, a tumble was inevitable. The funny thing was, the bell tolled for silver last night: gold shot up while silver crashed before being dragged down by the other metal's smackdown. Having fell, gold settled into a $1,550-$1,560 range whose unusual breadth ended up foreshadowing the volatility in today's regular trading. The metal went in with a double-digit loss. Just before 11:30, it sported a double-digit gain; it was close to setting another new record. The recovery was powered by the greenback tumbling and WTI crude oil recovering from the $2 bin Laden "Rest in Hell" drop. Once the U.S. dollar about-faced and ran up, both gold and silver lost their recovery gains. The two metals seemed to feed off each other's declines, with each pushing down the other. At the end of a volatile day, gold ended up with a twenty-dollar loss.

Although the early-morning range was unusually wide, it lasted an unusually long time. After gyrating from 1 AM ET to 10:00, the first break of the range was to the upside. $1,560 gave way just before 10:30. Catalyzed by the greenback and oil, gold climbed up steadily but then shifted to a run from 11:00 to 11:30. Peaking at $1,575, the metal very breifly sported a double-digit gain. The following plummet, starting when the greenback bolted up, was accentuated by the U.S. dollar's strength as well as silver's renewed woes. Still, by mid-afternoon, the metal had settled into a narrower range spanning the high 1550s. Had it remained there, it would have sported a loss but also would have bettered where it had been at the start of regular trading.

Alas, that bittersweet outcome was not to be. Instead, catalyzed by the greenback's rally pushing to its peak even though that peak barely put it in the plus column, the metal broke through $1,555 in a selling wave that left it around $1,545 when all was said and done. Instead of besting the start of regular trading, the metal ended up lower than it had been since last night's nadir. As of today's close, the spot price was $1,545.60 for a drop of $20.10 since Friday's close. The Kitco Gold Index attributed -$20.40 to predominant buying and+$0.30 to a weakening of the greenback.

Gold's six-month chart, from, shows today's plummet mostly erasing yesterday's run:

Despite the plummet, gold's Relative Strength Index (found at the top of its chart) still shows gold overbought. The metal's action today was close to making last night's tumble yet another fall out of bed, but that happy outcome was not to be. Gold's counterpoint gyrations with the greenback make sense from a qualitiative standpoint, but are exaggerated from a quantitative standpoint. What this means is, the U.S. dollar's climbs and slips are influencing sentiment. The gold market having decided that the main driver is the greenback, moves of the currency are having a direct effect on market psychology. The same goes for the shock crash of silver last night and its aftermath today. Having not shrugged off last night's tumble, gold is at risk for a short-term pullback. It's now May, the sell month in the old maxim.

The U.S. Dollar Index had a good afternoon, and its climb spanned most of regular trading, but the currency ended up about where it was at the end of last week. Getting up to 73.05 just before regular trading started, it double-topped at 9:45 after slipping and then skidded from 73.045 to 72.715. In so doing, it made a new thirty-one month low. Recovering after bottoming at 11:25, it spent the early afternoon rambling around 72.85. Then resuming its climb, it bested 73.05 at 4:20 but couldn't muster the energy to keep fording higher. Rather than giving up, it instead dawdled around 73.05. As of 5:15, it was at 73.04.

Its own six-month chart, also from, shows it still oversold despite notching up a small gain:

The lower wick of today's candlestick also shows its latest thirty-one-month trough. The last time the Index hesitated like this, it eventually sprung back but its gains were limited: the downward pressure continued after only one day. Should the Index snap up from its oversold position, and better its last countertend jump, gold will likely take a major hit.

Now that the metal has shown it's not invulnerable to pullbacks, the question of low will it go remains. Given the greenback's influence on gold sentiment, it's in the hands of the U.S. dollar. If overnight trading ends up volatile to little effect, or stays calm, the gold market has a chance to shake off today's disappointment like it has the last few others. It doing so, though, looks iffy given how overbought it still is.

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