Friday, May 6, 2011

Gold Gets Respite Despite Greenback's Rise

The U.S. Dollar spent the second day in a row running up, but gold wasn't pushed down in consequence this time. Instead, helped along by a recovery in silver, gold shook off its recent string of declines and managed to clamber up enought to rack up more than twenty dollars' worth of gain today. Although the metal never really became oversold, it did get overwrought enough to spring back and mitigate what would otherwise be a huge weekly loss. The loss for the week was still unusually large: $70.30, or 4.49%. Had gold stayed stuck at its nadir, the weekly loss would have been almost $100.

The metal started regular trading off floundering around $1,480. At 8:30 AM ET, the U.S. nonfarm payrolls report was released. The number of jobs added were more than expected: 244,000 instead of 175,000. The unemployment rate is now 9.0%. Gold initially rallied on the news, but it sunk back and stayed around $1,480. Then at 8:45, helped by a rally in silver from $33.25 to $36, it climbed up to $1,495. Thwarted at that level, gold sunk back and tried again but was frustrated again. Thus double-topping, it sunk back to a little above $1,485 before mounting a climb that got it peaking close to $1,500.

Alas, the day's high was only $1,499.50; the metal never touched $1,500. It spent the rest of the day fluctuating in a range between the low 1480s and high 1490s, moving in waves but directionlessly overall. Thanks to its gains in overnight trading and the centre of its range being well above yesterday's close, as well as it closing at the high end of its range today, the metal managed to notch up a gain that would be considered strong had it not come as the end of the week's plummet. As of the close, the spot price was $1,495.40 for a gain of $22.30 on the day. Reflecting the snapback, the Kitco Gold Index attributed +$38.50 to predominant buying. It also attributed -$16.50 to a strengthening greenback.

Gold's six-month chart, from, shows its snapback erasing about half of yesterday's decline:

The chart also shows gold's Relative Strength Index or RSI (found at the top of its chart) snapping back to above 50. Again, the rule for a bullish trend held: when the RSI gets to 50, or sink below that neutral level, gold's due for a bounce. Yesterday, it sunk to about 46; today, the metal rose a fair bit. Heavy Indian demand for Akshaya Tritiya helped push gold up in the overnight session, and bargain hunting helped both it and silver today. [I should add that silver broke that RSI rule: yesterday, it was close to being outright oversold. Last week, it was much more overbought than gold.]

The question now arises: how far will gold recover? If this May is like May of last year, the metal will come close to reaching its high before giving up and falling back. In current prices, this would mean gold climbing back up to above $1,550 before undergoing a more extended slide. More generally, the normal rule for plummets of this sort is for the asset to put on 1/3 to 2/3 of the loss before resuming the downtrend. In gold's case, that means reaching somewhere between $1,505 and $1,540. Should the metal reach as high as the latter number, it would be prudent for asset allocators to rebalance if their gold allocation is above their target percentage.

The U.S. Dollar Index, as indicated by the Kitco Gold Index above, had another great day. After starting regular trading around 74.2, it jumped up to almost 74.4 on the payrolls news but was blocked and sunk back to below 74.00. That drop, which helped both silver and gold, proved to be a fake-out. After bottoming at 73.925 around 9:20, it then spent the rest of the morning and some of the afternoon climbing. Although frustrated at times, the direction was almost all up until 2:40 PM. Then peaking at 74.915, it then sunk back to the low 74.7s as exhaustion crept in. It managed to gather enough strength to challenge its mid-afternoon high near the end of the session, though: at the end of the week, it closed at 74.91.

Its own six-month chart, also from Stockcharts, shows it making a strong run for the second day in a row:

Today's leap was less extensive than yesterday's, but it was still a strong gain. After dithering for five sessions prior, the Index has managed to snap back. Its own Relative Strength Index, found at the top of its chart, is now above the 50 neutral level. Given that it's in a primary downtrend, though, it might get stalled at 75. The rule for a primary downtrend says that an asset whose RSI snaps up to 50 will fall back into its slump. If the Index does manage to keep rallying to 75.50, we have a different kind of beast: a possible inverse head-and-shoulders bottom with 75.5 as the neckline. There's a chance that the greenback will have enough rally power over the coming month to push it up a fair bit higher, which would not be that good for gold.

The metal had a good day today, but given what happened earlier this week it counts as little more than a respite. Still, it's fortunate that gold didn't ruin the weekend by continuing to plummet. Next week should see some more relief climbing, but the late-winter/early-spring rally seems to be over. Given gold's seasonality, a more skeptical view seems called for. There's a chance that it'll make a new record this month, but it looks like it's arrived at another consolidation phase. It may be due for a correction before it gets enough wind to haul up in late summer and fall.

Before I go, I should make a disclosure. This morning, I decided to buy a 100 oz. silver bar on my credit card. I bought the silver for two reasons: first of all, silver was outright oversold and seemed more due for a bounce than gold; secondly, owning silver puts a bit of distance between my personal holdings and this blog. I have to confess that I own no gold: only a bit of junk silver and a few Maple Leafs prior to that purchase. I likely will buy gold in the summer, but in part because I want to give some as a gift. The above heads-up is to let you know what kind of skin I have in the game, so you can discount for any optimism about silver I have that spills over into gold.

In closing, I'd like to wish you a restful respite this weekend. Thanks for stopping by: if you've gone into bargain-hunting for gold, I wish you the best. Regardless of what happens over the next several months, the long-term trend is still up.

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