Thursday, May 5, 2011

Gold Gets Routed As Silver, Oil Tumble And Greenback Jumps

Today was a day where it seemed that everything went wrong for gold. The metal had already plummeted while the then-oversold greenback was steady, dragged down by silver's extended crash. WTI crude oil has been dropping too, adding to the downward pressure on gold. All three factors played a hand in shoving gold down today, particularly oil. It started sliding from $109 in early morning. From $107 at the start of regular trading, it plummeted to below $100 by the time the day was done. Silver lost almost five dollars an ounce from yesterday's close, making for another 10% down day. The gray metal has lost about fifteen dollars an ounce since it made its thirty-year high after a stunning parabolic rise. It's dropped about 30% since it topped, which has made for an all-out bear market in less than a week.

Adding to gold's pain was a breakout of the U.S. dollar from its oversold base today. The greenback had been indecisively hanging around its low for about a week, most of which saw gold drop. Since gold had been pushed up by the greenback's declines until recently, the currency's recovery made for a more complete rout today. At the end of the plummet, the metal had lost more than forty dollars an ounce. It's lost more than $100 since its record high made last Sunday evening.

Regular trading started with gold hovering in the high 1500s. Already sporting a double-digit loss, it ticked up when the jobless-claims number came in. For last week, there were 474,000 initial claims while expectations were for only 412,000. Strangely, the greenback jumped on the number; less strangely, it also liked the first-quarter productivity figure of 1.6%. There was good news for gold in the latter report, as an increase in nominal compensation of 2.6% were turned into a real-compensation loss of 2.5% by inflation. Gold liked the number enough to jump to $1,510 on the news and edge up to $1,513 at 10 AM ET.

Sadly, the rise of the greenback and the collapses in silver and oil overruled that news. Starting at 10:00, the metal gave way and tumbled to $1,480 in the next hour and a half. Pulling up to $1,489, it spent most of the afternoon sliding more slowly but for a longer time. It reached its daily low of $1,461.80 at 3:10. Then shoving itself up again, its relief climb managed to bring it to the low 1470s before it got exhausted. At the end of the day, the spot price was $1,473.10 for a decline of $43.40 on the day. The Kitco Gold Index split the loss into -$23.50 for predominant selling and -$19.90 for a strengthening greenback.

Gold's six-month chart, from, shows the extent of the damage today:

Today is the fourth day in a row the metal has declined, and most of those days have seen serious drops. This day's, of course, was the most serious. Gold's Moving Averange Convergence-Divergence lines, found at the botttom of its chart, made a bearish cross today. Like that indicator often does, it endorsed a serious drop that already took place. Gold was quite overbought last week, as its Relative Strength Index or RSI (found at the top of its chart) shows, but now its RSI is below the 50 neutral level. This drop shows the trouble that comes with even a successful anticipation of rough times: the previous good times look so impressive, the person who gets out at the right time tends to underestimate the extent of the subsequent decline. I had mused earlier about a pullback bringing gold back down to $1,500, which seemed like a lot when it was above $1,550. As it turned out, my musings understated the extent of the decline - which may not be over yet. The greenback may have some more climbing in store for it. On the other hand, gold's RSI tends to bottom at 50 when it's in a bull trend. It plunging to 45.79 gibes with a relief rally in the near future.

As for the U.S. Dollar Index, it smashed through its 73.3 resistance level right after the above-mentioned jobless claims and productivity reports came out. Intially sprinting, its pace slowed throughout regular trading but the rise was unusually steady until it topped at 74.225 at 3:30. Then running out of energy, it slid down to below 74.1 in late afternoon. As of 5:15, its slide was near the end at 74.095.

Its own six-month chart, also from, shows it breaking out of a short-term base:

I know the longer-term trend for the greenback is down, but its previous oversoldedness has made for a snapback that heralds another countertrend rally. The Index's own Moving Average Convergence-Divergence lines, found at the bottom of its chart, made a bullish cross today. They did so too late for someone who wanted to play the rally short-term, but the fact that they did so suggests this countertrend jump is going to be a significant one. The Index's Relative Strenth Index jumped to just below the 50 neutral level, which is normally the top during longer-term bear phases. It may have some run left in it, so gold has the potential of being squeezed more.

This coming overnight session marks the long-anticipated Akshaya Tritiya festival in India. It's said to be an auspicious day for starting a business venture and for buying gold. Thanks to the series of plummets gold has endured, it can be said that this year's Akshaya Tritiya is an auspicious day for getting gold at a short-term bargain. Once it's over, though, a major source of demand will be over with it. Wedding season will bring some more demand, but not in the same league as Akshaya Tritiya. May is here, and one of the reasons why "sell in May" is a well-known maxim is because Indian demand moderates. Gold might be good enough for a compensatory rally, but its drops the last four days show that the dog days of late spring and summer are upon us. If gold does gather strength and shove itself up, there'll be a second chance to get out for those who like to trade the metal. Monthly accumulators may want to consider making the monthly purchase around now, as gold may not be knocked down much more before recovering. An auspicious short-term bargain doesn't confine itself to one nationality.

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